Saving for retirement... starting at 68 years old

Question

It may sound like a joke, but it is not. I imagine I am not the only one in this situation. I guess.

Here is what I have going on. I am a "one man show" self employed carpenter. It took many years to find out how much I need to make to actually save money and collect a profit. Sad but true, before that, living paycheck to paycheck. I have been able to just over the past 2 years, kinda, start saving. IRS took most of my savings the past 2 years, since I did not know how much to pay into estimated tax payments, (including many years before) it took years just to not having to finance a portion of the late taxes. There is a lot more to it than that. Bottom line, I am counting on this year everything will be paid up properly since last year I jumped a tax bracket, and that surprised me, since I thought.... "I got it this year". I did have some savings left over after that fortunately. The year before wiped it out, but both past 2 years it was paid off with out having to finance any, a MAJOR milestone for me.

Back on track, I don't think an IRA will fit what I am needing, I haven't got an emergency fund yet, about a 1/4 of the way there, but getting there slowly. Credit cards are all paid off except for about $1000 on one for health care. One auto payment $260 monthly, besides a small mortgage (27 years to go on a 30 yr) on our home that has a lot of equity (500K??). My plan, as it is now, is to contribute into a 1 year CD, as in, move the emergency fund, or my account that I am letting the profits accumulate, set that into the CD since the money market account that the emergency fund is in is only earning .3%??? and a CD will get 3.45 if I get enough into it, 2.45 if I don't or something like that, never the less 10 times more interest just by placing it in the right place.

Is this the right idea? Of course I may be doing to little too late and should just move to Mexico and live off my Social Security which I am told my wife and can live VERY well on just that.

Answer 1

You can live comfortably on Social Security alone (my mother does it), but maybe not with a mortgage and a car payment, and maybe not in the area that you currently live. You might need to downsize both your car and your house into something that you can buy with cash or pay off very quickly.

Just moving your emergency fund to a higher-yield savings account does not solve the problem. Even if you have $10k saved up, a 3% account will only net you $300 per year, or $25 per month. I'd bet you can find ten times that in cost savings just by changing your lifestyle. Or use it to pay off the car and save that interest rate immediately.

I also don't think moving to Mexico is necessary. There are lots of places in the US that are very affordable (in my area you can buy a decent 2-bedroom home for $150k) without having to emigrate. Again, we're not talking about the lap of luxury, but if you truly want to "retire" that may be the best option.

If I were your financial advisor, I would not worry too much about tax-advantaged accounts yet. Taxes are not your problem. I would first look at your current budget: income, bills, etc. and see where you could cut to the bone. See how much you're spending on discretionary things like restaurants, vacations, etc. Sell the car and buy a beater. See how much equity you have in your home and whether it's feasible to downsize. Start saving like mad so that you can retire more comfortably on more than just social security.

Next I would look at your business and see where you can improve profitability. Are you not charging enough? Do you have expenses that could be reduced? Do you need to try and find more work, maybe even hire an employee to double the bottom line?

I do want to be encouraging - your situation is not bleak. You do have $500k in home equity and a very valuable skill that hopefully you can still utilize for enough time to live comfortable in retirement. It may just take difficult decisions or lifestyle changes, but that's something you and your wife will need to discuss to see what your retirement goals are, and what you can do to achieve them.

Answer 2

One important item that seems to be missing from your analysis is your actual monthly cashflows. Maybe you are already performing monthly budgets, but based on the fact that your tax obligations have been a surprise year-over-year, I suspect that you may not be reviewing your monthly ins and outs at all.

How you will prepare for retirement is dependent on what your monthly expenses will be in the future. What your monthly expenses will be in the future, is largely a function of what your monthly expenses are today, adjusted by the actual lifestyle changes you are planning to make. If you aren't in the habit of doing a monthly budget based on what you are currently spending, it will likely be very difficult for you to anticipate what your future expenses will actually be.

After you have made a reasonable attempt at budgeting your future monthly expenses, you need to look at what sources of income you will have in retirement. How much in Social Security will you receive monthly? Do you or your wife have any private pension plans or other forms of guaranteed income? How much do you expect to make from whatever level of work you are planning to continue [such as low-volume woodworking] to supplement that income? And finally - how much extra retirement savings do you expect to earn between now and retirement?

With these numbers in front of you, you will need to be very honest with yourself about what lifestyle you will be able to afford. $500k in equity on a house is a massive potential asset - but only if you plan to use it productively. If you stay in that house forever, the equity will never put food on your table. To access it for actual cashflow, you basically have 3 options: (1) downsize immediately and invest the remaining funds for further growth; (2) use a 'reverse mortgage' style of financial arrangement which basically gives you cash now with a promise of giving up your house in the future [again - cash now would need to be invested]; or (3) take on a renter if your situation allows for it. Simply planning to flip your house and buy a bigger one in the future will not provide cash for you in retirement.

Beyond the above, yes - once you have a handle on what your needs will be in the future, you will need to look at what will make sense for how to invest any funds between now and retirement. As pointed out elsewhere, this is not the biggest concern on the table.