Boomers Playing Catch-Up:

Building a Nest Egg Fast 

Baby Boomers never expected to get old. We thought we’d live forever, change the world and listen to Janis and Jimi for a purple-tinged eternity. Groovy, man. That was a far out time.

Today, we’re stock brokers, CEOs, accountants and government leaders. And the “live-fast; die young” thing got old about 30 years ago. Today, retirement is right around the corner but an awful lot of these Gray Panthers aren’t going to be able to enjoy a comfortable retirement. Not enough savings. “Hey, man, spare change?”

However, even if you’re under-capitalized for an over-the-top retirement, there’s still time, but the clock is ticking, in case you hadn’t noticed. So, if you don’t have a scratch stash big enough to carry you through another 25 or 30 years, there are some catch-up strategies you can use. They may not solve the low-cash flow situation entirely, but by taking a few simple steps today, you can avoid the nightmare scenario we all swore would never come. Who knew we’d get old?

What It’s Going To Cost in 10 Years

Remember when gas was 29 cents a gallon and two bucks filled the VW Bug decorated with big daisies. Back in the day, everything cost less. And you can bet that in the future, everything is going to cost more – a lot more.

We’re talking inflation. Inflation nibbles away at your buying power because each year money buys less. Prices go up but a buck is still a buck so you get less for more each year.

If we conservatively estimate an inflation rate of 3% a year (and that’s very conservative), in 10 years everything will cost 30% more than it does today. So, a gallon of gas that costs $3.00 today will cost $3.90 ten years in the future. (Probably much more, actually, but you get the idea.) Do the math. Electricity. Heating oil. Health care (which is climbing at a 10% inflation rate) – go through your monthly budget and add 30%. For a look at prices 20 years hence, add 60% to your current costs. That’s gonna hurt.

What Are Your Financial Needs?

Sit down with the calculator and add up all of the things you must have each month. Don’t count that expensive anniversary dinner or that new titanium driver you just picked up. Just the necessities. Food. Shelter. Clothing. Heat. A car and gas to run it.

Now, you may have less to worry about than some. For example, okay, maybe you don’t have a lot of cash in the bank but you own your homestead outright. That’s a nice asset, even in times of slow home sales. If you’ve owned the property for more than 10 years you’ve made money and, in some cases, a whole lot of money. Of course, you’ll still have to pay taxes on the place, but many communities offer seniors a break (yes, we’re senior citizens, Brother and Sister Boomers), but you won’t be making a monthly mortgage payment, and in fact you can use that tangible asset to generate cash with a reverse mortgage.

Your financial needs in the future can be reasonably projected based on what you spend today. Which brings us to one of the most critical aspects of building a nest egg fast: stop spending.

It takes time to build a nest egg. The more time, the bigger the omelet. But you plan on retiring in a few years so time is in somewhat short supply. That means you have to start banking some real dough in this game of financial catch-up.

There are still lots of people in their 50s and 60s who are buying up boats, big cars and RVs on credit! What, are you nuts? Your investments are microscopic, your debt load just keeps growing and you’re not even thinking about tomorrow. Listen up. The only way you’re going to avoid living out your days in “the home” is to have the cash to live independently. And that means putting more into stocks, bonds, CDs and other investment vehicles and spending less on things you don’t need. A little sacrifice now makes a big difference to the quality of your life in the future.

Simple. If you don’t need it don’t buy it. Even if you really, really want it.

Automate Your Savings Plan

Before you pay all of the other bills, pay yourself first. Pay yourself until it hurts. Remember, you’ve got some catching up to do. Oh, self-discipline was never your strong suit? No problem. You can automate your savings so you never even see the money. Most mutual funds, banks and self-directed brokerages have automated savings plans that remove money from your account automatically each week or month. You can then put that money to work for you making more money. And more money.

Automated withdrawals simplify saving and provide the impetus you need to stop spending more than you have. If you know that $500 is going to be taken out of your checking account the first business day of each month, you won’t have to discipline yourself to keep from buying that HDTV you’ve been eyeballing. It helps when you don’t even see it.

Don’t ever invest money in something that you don’t understand. Don’t invest in something that can’t be explained in a single sentence – even if your brother-in-law is positive this is a sure thing. There’s no such thing as a sure thing. Markets go up. Markets go down.

• Diversify your savings. Put some in stocks, some in bonds, some in money markets, some in CDs. Spread it around and don’t put all of your eggs in one basket.

• Rethinking the risk versus reward equation. Usually, the riskier the investment the higher the potential reward. In real world terms, if you invest in a penny stock you’re taking a much larger risk of losing some or all of your money than if you put that money into a bank CD. But, that risky new company may be the next Intel and you can retire rich.

 There are some investors who have performed both technical and fundamental   analysis on small and mid-cap stocks to develop the means of tipping the scales in  the investors’ favor with regard to risk versus reward. These people are called       rich. Indeed, there are predictors of market and individual stock movements, up or     down, that even the casual investor can discern with a little effort, but in general     (and if you’re not willing to put in the effort), bear in mind risk versus reward.       Then, look for every advantage you can find in determining stock movement ­   before the rest of the investment community does.

• Keep what you’ve got. Related to the point above. In financial terms it’s called preservation of capital. Keep what you have. So, avoid risky investments the older you get. And by retirement age, you want to be heavily into cash (CDs) and very conservative investments.

• Track your investment. You don’t need a broker. Use a low-cost, online brokerage. These companies usually come with a savings or “holding” account option – a place to park your money in between trades. Track your stocks at least once a week and always go over the quarterly statement sent by the mutual fund family or brokerage you’re using.  

Because you’re making up for lost time, consider putting some of your investment money into stocks or bonds that come with a higher degree of risk but a higher possible return. (See above.) However, even the most aggressive boomer should limit that money exposed to higher risk of loss to 10% of his or her entire asset portfolio.

This doesn’t mean you should take a flyer on some tip you heard around the water cooler, or buy some stock picked by throwing darts at the financial page. Be cautious in your risk. Some possibilities include: lower grade corporate bonds (sometimes called junk bonds) that kick out a higher yield because of that lower ranking, a high-yield mutual bond fund, a mid-cap that’s had several good years running or, perhaps a good blue chip that’s fallen out of favor with professional traders.

If you determine that your nerves can handle the risk associated with higher returns, put a little (no more than 10% tops) in investments that offer a better return in exchange for that higher risk. (Not for the weak of heart, btw.)

Make Your Money Grow  

Growth stocks are mid-cap and small-cap stocks that have the potential to increase in value, i.e. grow. Some people are value investors, looking for stocks that are under-priced – a value. Other people employ a growth investment strategy. These investors look for smaller companies that have the strong potential to increase in value.

Whether you’re a value or growth investor, keep a little of your portfolio in growth stocks. Why? Because these are the stars of the future. They’re not out-of-favor blue chips waiting to come back. These are the up-and-comers and by keeping some of your assets in “growth,” you lessen the prospect of seeing your buying power diminish due to the ever-rising cost of goods, also called inflation.

Here’s an example. Let’s say you put $100,000 into a bank CD paying 5%. (Lucky you.) And let’s say that inflation that year runs at 3%. Your buying power just slipped. And by the time you pay taxes on your 5% earnings (at the dividend and interest rate) you’re actually losing buying power each year. Your assets buy less even though your bottom line is growing!

Get the picture? Don’t put more than 10% at risk. Follow the fundamentals of intelligent investing. Be an investor, not a gambler. Automate the process to simplify your life today – and tomorrow. And add just a little spice to the mix with some growth stocks to fend off the effects of inflation.

No, it won’t be easy. And, yes, you’ll sacrifice today for a better, brighter future. We never expected to be here but here we are. And if your savings schedule is a little behind, start today to catch up.