If you want to retire successfully but are starting from scratch at age 50, you need a plan. This is the last installment of a four-part series on how to make it happen.
When we last met, the retirement redemption plan we had outlined was coming up just a little short of success. It had taken you from having no retirement assets at age 50 to a projected monthly shortage of only $292 by age 70.
This leaves you with two choices: Cross your fingers and hope it all works out OR put together a plan to bridge that gap and even go so far as to create a projected monthly surplus at retirement. I recommend the latter.
I’ve never believed you should try to out-accumulate avoidable obligations. Instead, no matter your current income and asset level, I believe you should eliminate obligations that complicate your life. In other words, it’s time to permanently reduce your need for income in retirement.
As part of doing that, I want you to do what it takes to pay off your house over the next 20 years.
Housing needs are as old as humanity itself. How you deal with the financial ramifications of that need will make all the difference in reaching your goal.
This plan will be easier if you’re already in the process of settling up with your lender. It will be tougher if you’re over-housed or your mortgage term extends far beyond your projected retirement age of 70. And if you’re currently renting, hearing homeownership is what bridges the gap seems like useless advice.
I believe homeownership (actually, outright homeownership) is the key to retirement peace. I also believe you should purchase a home with a legitimate plan to pay it off prior to retirement.
Unless you are the exception, your current largest household expense is your mortgage or rent payment. I know it's my largest monthly bill. Your reclamation project is complete when you convert your largest monthly liability into your most valuable asset. Not having a house payment is an achievable luxury. Not only is this particular strategy part of my personal retirement plan, but it’s also part of my college funding strategy.
Quick reminder – This entire series is assuming you’re an assetless 50-year-old with a $60,000 annual household income. Your current net monthly income is $3,400. If you were to let me choose how much you should spend on a mortgage or rent payment every month, I would advise roughly $850 (25 percent of take-home pay).
If you have plenty of retirement income, renting is a reasonable choice. If you don't have that retirement income, then inevitable annual rent increases will make your financial life increasingly difficult at a time you can’t afford it. Owning a condominium that has fees that grow each year will have the same effect. If you absolutely must rent or expose yourself to condo or maintenance fees, do your best to factor in the cost increases.
It’s important to note that you shouldn’t use your savings/investments to pay off the remaining balance on a mortgage, especially if your assets are sparse. Your goal should be to use your work income to eliminate your mortgage, even if it means seeking additional income opportunities to do it. Note, too, that once your mortgage is paid off and your cash flow improves, do not increase your lifestyle.
In summary, here is my four-part series distilled down to its essence.
When you’re 50 and broke, immediately begin to contribute at least 5 percent of your gross income to a retirement account and aggressively pay down debt for two years. Within that process, scrutinize your spending decisions and resolve to reduce your monthly spending by 10 percent. When your consumer debt is eliminated, ideally within two years, redirect that 10 percent spending change to your retirement account in perpetuity. And finally, craft a plan to eliminate your house payment by the day you retire.
You don’t have to adopt my particular strategy, but if you're 50 years old and your current path isn’t one that leads to a viable positive outcome in retirement, do something. How you got to be 50 and broke isn’t worth wasting your energy on at this point, unless you feel like it could offer some motivation. Making the changes I’ve described will be incredibly difficult. But that difficulty pales in comparison to the difficulty you’ll face if you don’t.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: "Million Dollar Plan." Have a question for Pete the Planner? Email him at AskPete@petetheplanner.com. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.