I have no 401(k) or any investments. All I will have is Social Security and that’s it. I’m 56 and want to invest so I can have something in 10 to 15 years.
Hey, Walt. Thanks for taking the time to write in.
I’m not privy to your entire financial situation, but I’m going to do my best to provide you some ideas to potentially help.
[ad#Google Adsense 336×280-IA]So the first thing to keep in mind is that you’re not that old.
56 is relatively young when you consider that many healthy American men are living well into their 80s and 90s. That means you have some time to catch up.
On the flip side of that coin, that also means you may have to financially plan for a few more decades.
But it’s a challenge that you’re clearly aware of.
And it looks like you’re up to it. So let’s see what we can do.
I first want you to be aware that amazing changes in one’s finances can take shape in a fairly short period of time.
I’m a great example of this.
By spending seven years of my life aggressively saving and intelligently investing my excess capital, I built a real-life six-figure portfolio of high-quality stocks that generates almost $1,000 per month in totally passive dividend income.
I’m not saying you have to be as aggressive with your finances as I’ve been, but seven years is also not a very long period of time. If you’re able to take your finances seriously, you could put yourself in a fantastic spot in just a few years.
Although investing is what I spend most of my time writing about, you can’t invest what you don’t have.
So you’ll first need to figure out how to generate capital to invest.
This will naturally come from your savings.
As such, you’ll want to start budgeting immediately (if you’re not already).
Think of a budget like a road map.
You can’t go somewhere if you don’t know where you’re already at. Budgeting tells you where you’re at. And you can then figure out how to get to where you want to be.
So you’ll want to start tracking every penny coming in and out of your life.
A great tool for this is Mint. It’s an online aggregator that pulls data from all of your accounts, and it greatly streamlines budgeting. Plus, its totally free!
Once you see where you’re at in terms of earning and spending, it’s time to figure out how to increase the former and reduce the latter. Doing so creates a greater gap between the two, thus increasing your savings rate. The higher you can get that savings rate, the better.
For perspective, I’ve saved well over 50% of my net income (after-tax income) for the duration of my journey from broke to wealthy. So let’s see how high you can get your savings rate.
There are a number of ways to accomplish a higher savings rate, although the most direct path initially will be to slash your spending as much as reasonably possible.
That means getting in touch with your inner frugality.
I can tell you that I did some pretty crazy things to get here: I sold my car, moved into a cheap apartment, ate ramen noodles, took the bus, cut cable.
Of course, you don’t need to get that extreme, as even minor changes can really add up.
Spending less will help you in two ways.
First, it’ll provide you more capital to invest, aiding your long-term financial goals, allowing you to build wealth and passive income.
Second, and perhaps just as important, it makes that Social Security benefit even more powerful.
The average monthly SS benefit for retired workers is $1,360.
So if you can get your monthly spending down to this level, you’re very flexible in terms of how you live your life. And if you’re personally going to earn more than this, you have even more flexibility.
One other way to go about increasing your savings rate is to increase your income. That may mean driving for Uber. You may want to look at getting a second part-time job for a few years. Or maybe you can work more hours at your current job (overtime). Lots of options here.
Another benefit of increasing your income might be increasing your SS benefit (since the SS benefit is based off of your highest 35 years of earnings. You still have time to juice your long-term SS benefit.
Once you’re able to build up your savings, it’s time to invest it.
In my view, the most intelligent way to invest one’s money for long-term wealth and passive income is dividend growth investing.
I’ve personally used this strategy to accomplish what I’ve already laid out.
Dividend growth investing simply involves buying and holding stock in high-quality businesses that reward their shareholders with growing dividend payments.
These growing dividend payments are funded from the growing profit a business generates.
After all, it doesn’t make sense to invest in a business that isn’t growing.
And if you own a slice of a business, you should naturally expect a portion of that growing profit.
Each week, I discuss a high-quality dividend growth stock that appears to be undervalued (priced less than it’s worth), meaning I try to provide readers valuable and actionable investment ideas every week.
These ideas could greatly assist you on your own journey.
Aggressive saving and investing in high-quality dividend growth stocks at attractive valuations is exactly what got me here, so it’s hard for me to recommend any other path.
You say you want to have something in 10 to 15 years. Okay.
Let’s say you’re able to start saving $500 per month. I’ll assume average stock market returns on that money (9% compounded annually). I’ll ignore taxes and inflation for the sake of brevity. And I’m giving you 10 years. That puts you at just 66 years old (still quite young).
If you can save and invest $500 per month at a 9% annualized compound return, that would turn into just under $100,000 in a decade from now!
Moreover, that kind of wealth could generate some pretty serious passive income for you.
Assuming a 4% yield (or 4% withdrawal rate), that could provide you $4,000 per year in totally passive income (or $333 per month).
That might mean you work until 66. That would mean you’ve built up a sizable net egg to complement your SS benefit, which itself would be higher if you wait until 66 (the full retirement age for SS) than if you were to take it at 62 (the earliest age you can receive SS retirement benefits).
And you probably would have developed financial skills (like how to live below your means) that will serve you well for the rest of your lifetime.
At 66, you might have decades to enjoy life and retirement. And you’ll likely be able to enjoy it far more if you have the backing of a solid base of assets providing you more flexibility, safety, confidence, and passive income.
One last point is that I’d strongly recommend you invest your excess capital via retirement accounts.
I never used traditional retirement accounts because I wanted to be able to live off of my passive income extremely early in life. But you’re in a different situation than I am.
Retirement accounts usually (except in certain circumstances) take pre-tax income and allow it to grow in a tax-deferred manner. These accounts could be a financial ally for you.
So investigate your options at work, like the availability of a 401(k). You may even be offered a match from your employer. If so, you should strongly consider taking advantage of that. The usage of a Roth IRA and/or IRA should also be looked at.
You still have time, Walt. You’re still relatively young. There are many opportunities in front of you.
But you have to start today.
I wish you luck and success.
Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.