If you can get 25 times your annual spending saved up and working for you, that is enough to live off—forever. Don’t worry about the details—just do the saving for now and watch as your lifestyle transforms and your worries about safety melt away.
Mr. Money Mustache
Is it possible to achieve financial independence so late in the game?
My answer is, Yes. I don’t have proof, but I have to start by assuming the answer is yes. It’s possible for older adults to start from scratch and achieve financial independence. By starting from scratch, I mean the person has no savings and no 401K cushion. Starting from scratch requires a creative strategy. To put it bluntly, a 64-year-old is in a bit of a time crunch. Compared to younger folk, the older adult doesn’t not wake up starting a sentence with, Thirty years from now, I’m going to …. In your 60s, you discover you don’t have the time. You also discover that living in the present is a healthier strategy. Yet, here we are, starting from scratch to prepare for a future that is hurtling towards us. It’s worth it. It will take more creative strategies to assess your current situation and plan a course to financial freedom starting at that age.
Your Current Situation
What got you to this place financially? Assessing your current state of your finances is vital. Debt, accumulated over the long haul, can make you bury your head in the sand. It’s daunting. Give yourself a good self talk, take a few deep breaths, and open the mail. Total the debts. Think about the past only to locate the older bills. Don’t think about the future. Your task today is just to total the numbers. What is your current income? What are your expenses? The most important activity is determining the amount of debt you have and comparing that to your assets.
Create a Budget
Do you know some people don’t know how much they have spent for a short period until they tackle their taxes? I am one of those people. I am often shocked when I see those line items in income taxes. That I am surprised tells me budgeting is vital. You shouldn’t just feel a nagging sense that you are overspending somewhere. You shouldn’t get turned down at the cash register. Creating a budget is an important step towards financial independence. Be intimate with your money. Set up the budget and become obsessive about tracking it weekly, if not daily. It has to become your baby. Start with your income tax statement and work your way back. It will give you the drive and energy you need to reduce your expenses, save, and increase income.
Start paying off debts
Someone at your shoulder will ask you why you need to set a goal to pay off debt. At this age, who cares? Debt has consequences not just for the debtor but for the larger society. As I have gotten older, I have become more conscious of my wake in the larger society. What am I leaving behind? Personal debt has a carbon footprint. It certainly raises stress levels, makes you buy stuff you sometimes can’t recycle, and even impairs your judgement.
The math shows we need to pay off the debts with the highest interest rate first. Financial independence super site, ChooseFI reiterates that fact: “remember not to sacrifice paying additional funds towards higher APR cards and not make the minimum payments on the lower APR cards.” (ChooseFI 2023, Internet) The blog also reminds readers not to get rid of the debt, not close the card down. At the other end, call your credit card company and renegotiate repayment. Communicating with the debtor is the first step towards peace and taking down your stress down several levels. It tells the ego there is nothing to fear. Such a step lowers stress and slows down the aging process.
Start Saving
My life coach utters this reminder constantly, “You can succeed at any point, at any age in your life.” How does that translate into the daily tasks? Start saving for this emergency fund everyone is talking about. Find waste. I have noticed lately that I am in the supermarket three times per week. Each time I come home with very heavy bags. It’s too much. I am more than sure, I can cut my supermarket bill. Have you seen the price of restaurant meals lately? Wanting a change of taste and scenery can run me $40 in some locales. That’s $160 per month. Bluntly put, the strapped-for-cash person can’t serve life this way. Paying off my debt is a more rewarding feeling.
Some financial independents say you should pay off debt, then double down on savings. Even if the math proves this to be true, a 64-year-old, under time constraints, can’t take the linear approach. I’ll even go further and say saving and paying off debt are on the same level on the list of priorities. When you are my age, you can’t wait 30 years for dividends. It’s illogical. Even if I am wearing a sash that says I am going to live to be a centenarian, I know deep down that I am making a big assumption. I need to prepare for future possibilities, plant my feet planted firmly in the present, and have fun with these goals.
Investopedia provides the formula for compound interest: “[P(1+i)n]-P where P is principal, “I” is interest rate in percentage terms and “n” is the number of compounding periods.” For the older adult, the number of compounding periods will be far less than that of the average youngster. Therefore, our “P” will have to increase. It’s simple. If you are in your 50s, are lucky enough to still have an employer, and have a 401K package, then max it out. Don’t be ashamed of your past, be aggressive. If you haven’t taken advantage of the 401K or the federal Thrift Savings Plan, start now. Unfortunately, many people are not in this position. They are freelancers or they are self-employed. Per the IRS, up to “25% of your earnings” can go towards an SEP or Simplified Employee Pension” (IRS, Internet). You can also begin a solo 401K plan, a traditional IRA, or Roth IRA. That’s just the beginning. There are more ways to save.
set investment goal
- Talk to experts and research case studies
- Decide how much money you’ll spend per year
- Remember this process is the means to an end
- Find joy in the process
Education should start the minute I imagine myself as financially independent. Think and feel like Warren Buffett. In his most recent interview on CNBC, Buffett said, “I love figures.” We too should develop a new attitude about investing. He also said that if he were starting over, he would invest in low-cost index funds. However, to use a cliché, I have put the cart before the horse. What is my goal?
To establish a goal, I need to know how much money I need for retirement in order to live a decent life on the monthly dividends? Financial independence people ask it this way: “What is your financial independence (FI) number? Long time financial independence enthusiast and blogger, Mr. Money Mustache, says:
If you can get 25 times your annual spending saved up and working for you, that is enough to live off—forever. Don’t worry about the details—just do the saving for now and watch as your lifestyle transforms and your worries about safety melt away. (Mr. Money Mustache February 22, 2013, Internet)
Where did he get this formula? He says “don’t worry about the details,” but does it mean you expect to live for 25 years after retirement? Should my number be smaller? I am now obsessing about the number of years I am going to live. It’s time for deep breaths and shifting my attention. Mr. Money Mustache has an excellent post answering this question about how much money should be invested and working for you: The 4% Rule: The Easy Answer To “How Much I Need In Retirement?” The article gives an example:
To apply it in real life, just take your annual spending level, and multiply it by 25. That’s how much you need to retire, at the most. A $25,000 spender like me needs $625,000. I’ve got more than that, plus various safety margins in the lifestyle, so all is good.” (Mr. Money Mustache May 29, 2012)
Mr. Money Mustache did his personal calculation ten years ago. I looked around to see if the number had changed. Some in the community have increased the number of years from 25 to 30. This requires you to have approximately $1 million in investments. DaveRamsey.Com now says that number is worth revisiting. He ran the numbers to show that “$1 million today will have the same purchasing power as $1.8 million two decades from now.” (Ramsey March 14, 2023, Internet) I have to save more. My ego is having a meltdown. I will stick with Mr. Money Mustache’s projection. It’s more believable.
Set an investment strategy
Which investing category do I fit in? Information about starting from scratch in your 60s is scarce. Let’s look at what Zina Kumock says. In your 60s, you are trying to protect your investments. On the other hand, 40-year-olds who delayed investing should start with 60-70% in Stocks and 30-40% in bonds: “You’ll need to save in aggressive assets like stocks to give your funds the best chance to beat inflation.”(Kumok 2022, Internet) She reports people invest at least 15% of their income. So I have to approach this project as a 40-year-old, but invest over 15% of my income. What would I have to invest monthly to reach $1 million by the time I am 71 years old? I put the number in Dave Ramsey’s calculator. It will take $10,000 per month with a conservative 7% annual return to reach that number. If 15% of my net is $10,000, then I am bringing in roughly $70,000 per month. Let’s go back to the drawing board. Kumok is right. I have to be more aggressive. My annual return has to increase.
increase income
Consider additional sources of income, starting a part-time job or a small business. It’s my highest mountain to climb. A popular meme in the early 2000s was the individual who had 6 streams of income. It’s not a new idea. Wealthy people have done that for ages. They have the proverbial fingers in various pies. Now, the twist on the trend is the multi-hyphenate person. One doesn’t have to be a genius to be multi-hyphenate. Do an audit of your skills. Even if the ego is in your head is chattering about the fact you know nothing, ignore it. It’s highly improbable that you have gone through 4 or 5 decades with only one skill. This additional income is going to help you pay down debt and accumulate savings and investments more quickly.
to wrap up
- Watch your self talk
- Think like a Mustachian
- Don’t lose your curiosity and your joy
Begin with this premise and self-talk: You can start from scratch and achieve financial independence. Then get creative. The older person can’t use all the tactics that younger people use. Borrow from the FI community what makes sense for you and the amount of energy you have. At my age, I have to think like Warren Buffett, think like a Mustachian, and keep my attention on the bigger picture of love and service. I can’t defer that. I need to be patient with myself as I change my financial picture. Self-blame depletes energy. As soon as the recriminations surface, thank them and send them away. I will need all my energy for extreme curiosity, idea generation, and execution.
References
Fernando, J. (2023, March 28). The power of compound interest: Calculations and examples. Investopedia. https://www.investopedia.com/terms/c/compoundinterest.asp (Retrieved May 4, 2023)
Internal Revenue Service. (n.d.). Retirement plans for self-employed people. < https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people> (Retrieved May 4, 2023)
Kumok, Zina. September 2022. How to Invest at any Age. Investopedia.Com. <https://www.investopedia.com/articles/investing/090915/are-your-investments-right-your-age.asp#toc-beginning-retirement-planning-your-20s> (Retrieved May 12, 2023)
Mr. Money Mustache. May 2012. The 4% Rule: The Easy Answer To How Much Do I Need For Retirement. MrMoneyMustache.Com. <https://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ > (Retrieved 5/12/2023)
Mr. Money Mustache. February 2013. Getting Rich: From Zero To Hero in One Blog Post. MrMoneyMustache.Com. < https://www.mrmoneymustache.com/2013/02/22/getting-rich-from-zero-to-hero-in-one-blog-post/ > (Retrieved 5/12/2023)
Ramsey Solutions. March 14, 2023. Can You Retire on $1 Million? DaveRamsey.Com. <https://www.choosefi.com/credit-101-the-ultimate-guide-to-credit/#17-make-credit-cards-work-for-you (Retrieved May 12, 2023)
Squawk Box TV Show. (2023, April 21). Warren Buffett Full Interview (2023) Economy, Fed, Bitcoin. <https://www.youtube.com/watch?v=b1UB7HWrDIo > (Retrieved May 4, 2023)
U.S. Office of Personnel Management. (n.d.). Thrift Savings Plan. <https://www.opm.gov/retirement-center/my-annuity-and-benefits/thrift-savings-plan/#> (Retrieved May 4, 2023)
