Middle-Aged Investor Scenario
Traits of the middle-aged investor:
- Around ages 45-50
- Married (or Single)
- Combined income $100,000 per year
- Spends $80,000 per year (or more) in expenses/lifestyle
- Full retirement age: 67.
- Live to age 90.
- Doesn’t want to depend on social security for income
The middle-aged investor has many issues when it comes to financial planning:
- Possible need for life insurance and disability insurance
- Amassed more personal property that may need replacing (electronics, cars, new furniture)
- Family vacations
- Lots of activities for the children (sports, school events)
- A mortgage
- A great need for cash reserve
- A desire to put their children through college
- May have not been saving for retirement or saving some in their 401(k) at work
Because this couple has a lot of expenses, saving for retirement can be quite a challenge. Their time horizon is much shorter, and if they didn’t save earlier in life then saving for a retirement that may last 23 years or more (with only 17 years to save for that) does become challenging.
Let’s say that you have $115,000 in retirement savings at age 50, and your lifestyle expenses will be $80,000 per year in retirement (that’s after college, school expenses, etc):
- Age 67: $132,000 in expenses (3% inflation rate)
- Lump Sum needed at age 67: $2,200,0001
- Savings at age 50: $115,000
- Monthly savings needed: $3,102!
That’s a lot of money to save monthly! And we’ve yet to know what type of accounts that will be going into, because there are limits to what you can save in a 401(k) and an IRA.
Why would i have to save so much?
It all goes back to the Time Value of Money (TVM). If you were the young investor, time is on your side. Waiting until age 50 to begin saving for retirement means you need to have the available cash to save in order to be able to fully retire at age 67 and not depend on social security.