You've lived your life to the fullest. But now, you're 20 years from retirement and have no money. Don't panic. You can still retire in 20 years if you just make the most of your investment decisions now.
Determining Investment Goals
You are probably in your mid-to-late 40s if you are 20 years from retirement. Your kids may already be through college. But, your parents may be retiring and need financial help. Or, your kids and parents may be moving in with you!
Twenty years until retirement gives you enough time to build a retirement nest egg. The key is to make a financial plan and stick with it. Your plan should include:
- Maximum returns - Find investments that provide maximum return without major risk.
- Tax-advantaged investments - Pick investments where your returns are not taxed each year.
- On-going investing - Add to your investments regularly and reinvest your returns.
How Much Will You Need?
Everyone, regardless of their age, should have enough savings to last about six months in case of emergencies. You may need this money if you lose your job or have a medical or family emergency. Once you have these emergency savings, you should start investing money for your more long-term needs such as retirement.
Start by deciding on your investment needs to cover up-coming expenses, the amount you will need and when you will need the money:
- College tuition - Tuition, book and living expenses can be costly. Consider using a student loan to finance the expenses. This will free-up your available cash for saving and investing. Contact your college of choice for more information.
- Care for parents - The health or living needs of a parent can change quickly. You may need to help them financially or you may need to cut back on your work hours to provide in-person care.
- Your retirement - Retirement calculators can help you determine how much money you will need each month after you retire. Calculators also help you project your income flow and how your investments will grow over time. With this information, you can determine the total amount you should have available when you retire.
Strategies for 20 Years to Retire and No Money
Once you have determined your investment needs you can build your investment strategies. Your strategies should focus on freeing up cash to invest. For example:
- Start tracking your expenses - Look for expense items you can cut or reduce. Invest this cash.
- Stop incurring debt - Put away the credit cards except for emergencies or big purchases on which you might want to reverse the charge if there is a problem. The money you save on credit card interest can be used for investing.
- Budget for investing - Add a certain amount to your budget for investing. Consider having this amount automatically moved each month from your checking account to your investment account.
- Stop renting - Buy a home. Your monthly outlay may be more; but a large portion of your mortgage payment will be tax deductible. The tax savings can be invested.
- Let the government help you save - Open an individual retirement account. The money you invest into the IRA may lower the amount of taxes you pay. The advantages of an IRA are:
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- Your taxable income may be reduced, resulting in a lower tax bill.
- The interest earned can be tax deferred until retirement.
- Let your employer help you invest - Contribute to a 401K plan if one is available from your employer. The amount you invest, and the amount contributed by your employer may reduce your taxable income.
Investment Alternatives
It is important to select the right types of investment accounts. Talk to investment and tax professionals about your specific situation. They can help you select the type of account that will be the best for your financial situation.
The tax advantages of an IRA or 401K plan make these two investment accounts attractive to the investor who has 20 years to retire and no money.
Investments in stocks and bonds or in certificates of deposit give you the opportunity to withdraw funds without tax penalty if needed for emergencies. However, these types of investments usually do not have the same tax advantages as an IRA or 401K plan.
Individual Retirement Account
IRAs have tax advantages which can help your investments grow more quickly.
There are two types of IRAs:
- Simple or Traditional IRA - This type of IRA provides tax-deferred growth with the potential for tax-deductible contributions. The earnings will not be taxed until withdrawal. The earnings and tax-deductible contributions are taxed as income when withdrawn. A required minimum distribution must begin after age 70-½.
- Roth IRA - This type of IRA provides the opportunity for tax-free growth. Contributions can be withdrawn at any time without penalty. Earnings can be withdrawn tax-free and penalty-free after age 59-½ if the account has been open for at least five years. There is no minimum distribution after age 70-½.
401K Plan
A 401K plan is a retirement savings plan offered by an employer. It is funded by contributions from the employee. In many cases, the employer may match a portion of the employee's contribution. The contributions are not considered taxable income. The earnings grow tax-free until they are withdrawn.
For More Information
- Consult your investment or tax professional.
- Internal Revenue Service - Information on IRAs.
- AARP Retirement Planning Video - Five short online videos on "getting smart" with your money, retirement planning and selecting investments.
- AARP Retirement Quiz - Check your knowledge of the major misconceptions about retirement planning.
