A Late-Starter's Guide to Saving for Retirement

Let's take a look at model portfolios for our star late-starters.

Model Portfolio for Tracy and George in their 50s: [table] Asset Class Percentage of Portfolio Expected 10-Year Return Form of Investment U.S. Stocks Fund 25% 10% Total Market Index 10-Year Treasury Bonds 15% 6% Individual Bonds REITs 25% 10% REIT Index Fund Foreign Stocks 25% 10% No Load Fund Emerging Market Stocks 10% 14% No Load Fund Current combined income: $72,000/year after taxes Projected retirement expenses: $54,000/year Savings: $100,000 in home equity

Current combined income: $72,000/year after taxes
Projected retirement expenses: $54,000/year
Savings: $100,000 in home equity

If Tracy and George reduce their spending $18,000 a year and sell their house, investing the $100,000 of equity, they can reach their retirement goals by age 66.

If their expenses and income increase by 3 percent a year between now and retirement, then about $680,000 will be required to pay all their expenses not covered by Social Security during a long retirement period. Yet with a 10 percent annual return from a diverse portfolio of U.S. stocks, REITs, foreign stock, emerging market stocks and bonds, in 16 years they will have $970,000 in investments.

Play with the factors. Let's say their expenses increase less than 3 percent a year, or they can achieve returns of better than 10 percent a year, or their income increases better than 3 percent a year, then they can choose either a larger retirement portfolio or cut back less on their lifestyle now. Though Tracy and George face some major lifestyle adjustments, they can be confident of a solvent and prosperous retirement if they make those sacrifices now.

Model Portfolio for James in his 60s [table] Asset Class Percentage of Portfolio Expected 10-Year Return Form of Investment 5-Year Treasury Bonds 30% 5% Individual Bonds Utilities Stocks 40% 9% No-Load Utility Fund REITs 40% 10% REIT Index Fund

Current income: $40,000/year after taxes
Retirement expenses: $40,000/year
Savings: $6,000 in an IRA

James' prospects depend entirely on how much more income he can bring in with a new employer or a new career. His investment horizon depends on his success in creating savings. If he can make large contributions to a retirement plan, he can expect to live on his investments for the rest of his life. To fund $25,000 of income, the difference between his living expenses and his maximum payment from Social Security, beginning at age 72, James needs to save at least $15,000 a year. Each year this money should be invested in a mix of volatile and high-risk investments suggested in the first portfolio. If James, however, can only create small amounts of savings, he will neither have the asset base nor the time to ride out returns from volatile asset classes. Then he should stick with more conservative investments and expect to work full-time until age 72 and part-time thereafter until he is no longer able to work. A portfolio of medium-term Treasury bonds, utility and other income stocks and REITs will provide security and growth with less risk.

The Bottom Line
Like Tracy, George and James, you can take action to improve your financial security in retirement. With help, debtors have become creditors, spenders have become savers. For all late starters, there is hope.

Next: Your Late-Starter's Toolkit >