This question comes from Ashley in Sacramento!…
“Hey there, Matt and Joel. I really wish you guys were around when I was in my twenties. Alas, I am now 61 years old and the only real retirement savings I have is my public service pension.
I’ll probably start dipping into it in about seven years, so I’ll be taking home a really good portion of the salary that I’m currently earning.
I do have two questions for you: The first one is how does a pension affect the money gears?
And the second question is: Is it really worth opening a retirement account at this late stage in the game? If so, what type of account should I be considering? Thank you so much, I really love this show.”
Matt & Joel’s response:
That pension is an incredible thing to have, Ashley!
The fact that it’ll provide pretty darn close to your current level of pay is a massive win for you. Congrats for sticking it out in public service for so long.
Most of our younger listeners are probs scratching their heads. Joel actually has a small pension from a radio gig years ago. It’s chump change compared to yours, Ashley. But it’s better than nothing.
But let’s get to your question: Should you save for retirement outside of your pension?
Depending on a pension
Retirement was traditionally referred to as a 3-legged stool.
Ideally, retirees could depend on 3 different income sources. It was all about having a pension, social security checks, and your own personal nest egg. That combo was sufficient for most folks.
So for that stool not to be rickety, you needed a healthy dose of all three.
But, life doesn’t always work out perfectly according to plan. For folks who don’t have a pension (most workers in the US these days), that means even more dedication is needed on the personal savings leg!
Some people won’t qualify for Social Security either, or maybe only receive a meager check when retirement time comes. So they need an extremely good savings plan to be on track for retirement.
Since you do have a pension Ashley, and it’s really healthy, this does mean that you don’t need to go quite as hard on your paycheck savings and retirement investing.
Is it too late to save for retirement?
It’s super tempting to throw your hands up and say “I’m too old to make a significant difference in my retirement nest egg”.
But that is definitely not true! It’s never too late to save money, whether you’re trying to catch up, or get further ahead.
Each dollar you save for the future puts you in a stronger position. And in your case, Ashley, it can build a buffer on top of your pension and social security income.
Saving more now gives you more flexibility and options later.
Which retirement accounts are best?
First, consider opening up a Roth IRA and maxing out those contributions for the next 7 years.
This year’s contribution limit is $7,000, but because you’re over 55 you qualify for an additional $1,000 catch-up contributions. So $8,000 total.
Simple math tells me that 8k x 7 years = $56k. That’s not even factoring in earnings! There’s no harm in socking away more if you’re able to!
Another option is investing in a plain ol’ brokerage account. They’re super flexible and give you a ton of options to move money around as a retiree.
As for where to open an account, definitely prioritize working with one of our low-cost faves like Vanguard, Fidelity, or Schwab.
Funds and asset allocation
And something else, you’ll probably want to invest those dollars in a Target Date Fund instead of the S&P 500.
Since you’ll actually be pulling some of those dollars back out in the not too distant future, you’ll want to have a more conservative investment approach.
Target Date Funds will give you a better mix of stock/bonds for your age, based on your retirement timeline. And choosing TDFs with Vanguard are great because most of the underlying stocks and bonds are actually index funds. Which means low expense ratios!
What are your retirement goals?
One other thing to consider is what your living expenses will truly be in retirement.
And do you have hopes/dreams for a different type of lifestyle?
Will you have a paid off car and mortgage? You might not need as much income as you think!
Do you want a massive travel budget? Socking away more might make sense!
Just keep that in mind that the amount you need to retire is based on your lifestyle goals and needs. It never hurts saving more to open up those options later in life.
The Bottom Line:
Pensions, especially from private employers, can be taken away in an instant (this actually happened to Joel!). So we almost always recommend people save for retirement outside of their pension.
We’re not saying you’re at risk, Ashley. It sounds like you’ve got an almost guaranteed amount headed your way that you can live off. But still, it might be worth saving a little extra in addition.
Saving more in the coming years will have a two-fold effect. First, it’ll get you used to living on a little bit less. And, of course, you’ll be increasing your options and flexibility in retirement.
Again, the pension is a luxury. But we also don’t think that a generous pension mitigates the need to invest.
For the full version of this discussion, check out Podcast Episode #805 (it’s the 3rd question we answer in the episode)
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