50 years old with no savings

[mrfeh]

But will he end up with more money in the end with a t-ira than a Roth? That's the part that I can't figure out. I don't know his income now, but I think it's a safe bet it will be lower income in retirement for him, if he is even able to retire.

Assuming all else is equal, the only thing that matters is the tax rate. If it will be lower in retirement, you want to defer taxes.

More info: https://www.bogleheads.org/wiki/Tax_basics

 

[UnrealizedPotential]

Assuming all else is equal, the only thing that matters is the tax rate. If it will be lower in retirement, you want to defer taxes.

More info: https://www.bogleheads.org/wiki/Tax_basics

I have to admit this part is a little beyond my understanding. But since I agree with you that his future income is likely to be lower in retirement and others are saying that a tax deferred is better for him, I will bow to your advice. I will call him , but I will recommend the T-ira instead of the Roth.

ETA- I called him. I recommended the traditional Ira instead of the Roth for him. I feel I did my best to help him. That's all I can do.

 

[rothlev]

I have to admit this part is a little beyond my understanding. But since I agree with you that his future income is likely to be lower in retirement and others are saying that a tax deferred is better for him, I will bow to your advice. I will call him , but I will recommend the T-ira instead of the Roth.

ETA- I called him. I recommended the traditional Ira instead of the Roth for him. I feel I did my best to help him. That's all I can do.

He will pay less in taxes now with the traditional, and he will pay 0 in taxes either way upon retirement. He is saving money by lowering his federal tax bill, by deferring. Upon retirement if social security is his main or only source of income he will not owe any taxes on it anyway, so there is no purpose for the ROTH. ( The purpose of a ROTH is to have tax free income at retirement ). ( his income is already tax free)

The growth of the money would be the same either way.

 

[rothlev]

He does need to know that any money he sets aside in a traditional IRA MUST be left alone. If he changes his mind and withdraws the money he will pay a 10% penalty and the tax. He cannot touch the money until retirement. If he thinks he may need the money earlier than 59 1/2 then the ROTH is a better option.

 

[ncbill]

No easy solution.

I'd say work until at least 70 if physically possible, take SS no earlier than 70 as well.

 

[pb4uski]

....For me the lightbulb was 25 + years or so ago when I saw a spreadsheet that showed the affects of investment compounding + adding additional savings to it each year. Even when I had the years of college educations ahead of me. ....

If he saves $100/month from now until he is 70 in 20 years and it earns 6%/year then he'll have $46,205 at age 70.... at a 4% WR that would be $154/month.

$200/month saved would be $308/month at age 70.

Etc.

Steer him to my third tag line....Solw and steady wins the race.

 

[JustCurious]

I now realize that some are just not savers.

Exactly. Some people are savers and some people are not, and no amount of education or fancy charts will change that.

 

[UnrealizedPotential]

Assuming all else is equal, the only thing that matters is the tax rate. If it will be lower in retirement, you want to defer taxes.

More info: https://www.bogleheads.org/wiki/Tax_basics

So when income is higher during working years, he will benefit from getting a tax credit. But during retirement when we believe his income will be lower he will benefit because he pays lower or no taxes because of the lower income. Am I understanding the basic idea? Anyone can answer this. I am just trying to increase my knowledge.

 

[HI Bill]

So when income is higher during working years, he will benefit from getting a tax credit. But during retirement when we believe his income will be lower he will benefit because he pays lower or no taxes because of the lower income. Am I understanding the basic idea? Anyone can answer this. I am just trying to increase my knowledge.

Yes, if the tax rate (tax bracket %) is anticipated to be higher prior to retirement, then saving tax-deferred is best, if when you take distributions (and SS), then your retirement tax bracket will be lower. The idea is to pay the lowest lifetime taxes and maximize your cash flow.

 

[UnrealizedPotential]

Yes, if the tax rate (tax bracket %) is anticipated to be higher prior to retirement, then saving tax-deferred is best, if when you take distributions (and SS), then your retirement tax bracket will be lower. The idea is to pay the lowest lifetime taxes.

I understand much better now. Thanks! That is why this forum is so great. There is so much to learn and members are willing to help you learn what you need a little help with.

 

[rothlev]

So when income is higher during working years, he will benefit from getting a tax credit. But during retirement when we believe his income will be lower he will benefit because he pays lower or no taxes because of the lower income. Am I understanding the basic idea? Anyone can answer this. I am just trying to increase my knowledge.

It is not a tax credit - It is a deduction from income - He will pay taxes on less income -

At retirement social security income is taxed differently than earned income , and when it is stand only, or the main part of income there is no tax on income at all.
So given he has no savings now, it is unlikely that he will be paying any taxes in retirement. He takes the tax break now and saves money on both federal and state tax returns.

 

[N02L84ER]

Thanks. I looked up the difference between a tax credit and deduction of income. One is a direct reduction of taxes owed {tax credit} and the other is a reduction of income to be taxed {deduction of income}. Correct?

Yes, this is correct. A minor nit, but if the 50 y.o. income is high enough to owe taxes after the IRA deduction but low enough to qualify for the "Savers Credit", then the IRA contribution could result in both a tax credit and a deduction of income.

 

[rothlev]

Correct: So in that case it is double benefit to use it. - The Roth would also generate a savers credit if applicable.

 

[TrophyWife]

What do you all think about encouraging him to buy a small condo if he is in a low cost of living area? It seems like at least, he would be building some equity and possibly pay it off over the next 20 years

 

[The Cosmic Avenger]

What do you all think about encouraging him to buy a small condo if he is in a low cost of living area? It seems like at least, he would be building some equity and possibly pay it off over the next 20 years

My two cents: even 10 years ago I'd say yes, but now it feels like it's asking a bit too much of him, and he'd still have to sell it to live off of the proceeds. I mean, maybe, because it is forced savings in a way, and he does sound like that discipline is the biggest issue for him, but at least if he fails at saving he's no worse off. He can get himself into a lot more trouble with a condo.

 

[UnrealizedPotential]

What do you all think about encouraging him to buy a small condo if he is in a low cost of living area? It seems like at least, he would be building some equity and possibly pay it off over the next 20 years

I thought about that, but feared he may at some point try to use it as a bank. He never mentioned debt and he might see the equity he builds up as a bank account he can use as an ATM.

I mean, a reverse mortgage might be good for him, maybe, but I don't think he would make it that far before he takes out what equity he should be building up. He could go into debt borrowing.

 

[UnrealizedPotential]

Is the small business worth anything? Would he be able to monetize the business when he wants to retire?

Great question. I don't know. I am not close to him personally, so there is no way to find out. I feel I already went beyond my comfort zone to help the man and I am not eager for more.

 

[brett]

I do not think that this is an exception. I have a few inlaws who are ten years older or more but in the same boat. But they keep spending, spending, spending.

I really think that the very best advice you can give him is to seek out the help of a good fee for service financial advisor. Someone who will work with him and his wife or family on an entire financial plan that encompasses income, investments, tax, when to take SS, etc. and perhaps help valuate the business or refer him to a professional in business valuation.

He needs to get this right. Now. You cannot do this for him/them.

 

[ckelly78z]

We can postulate over the possabilities forever, but the motivation to start savings lies at his feet, and advice won't be taken if it is too complex. Most folks don't understand the financial ins/outs of what is being discussed on this forum, and they generally avoid what makes them uncomfortable. This is exactly how he, (and many others) have found themselves in similar situations.

At a point, embarrassment sets in, and they won't ask for help, or resignation sets in, and the kick the can down the road.

I like what BRETT ^^^ has to say also !

 

[MarieIG]

It all depends on what his non-discretionary expenses are. As you probably know, SS retirement benefits replace more income for low income retirees than it does for higher income retirees... roughly 55% for lower income retirees.

My grandmother lived pretty well on nothing else other than SS... in fact, she actually saved money while on SS because she lived frugally and her low income qualified her for subsidized senior housing (which was quite nice by the way).

Sounds like my grandmother, except she qualified for a rent controlled apartment in NYC.

 

[Oz investor]

I ran across a man recently that like the title says is 50 years old. He has no savings of any kind. He is married. He has no clue how to get started or what to do. All he will have is Social Security. I feel bad for him, and his wife.

So he asked me for advice. This man clearly needs help. So I gave him the best advice I knew how. I asked him if he is willing to work until 70. He told me he has already resigned himself to the fact that he has no choice .

So I gave him the name of a broker he can use. I'm not promoting the broker so don't want to say. I told him to open up a Roth Ira. Put whatever money you can in the SP 500 index fund. I drove the point home that withdrawals are tax free. I told him try to hold off on SS until age 70. Then at the same time he can take withdrawals from his Roth Ira.

I try not to give advice. But at 50 years old I felt this man didn't have time to get educated. I told him what to ask for help with and tried my best to steer him in the right direction. My thought was with the Roth Ira and SS he will struggle at age 70 financially , but at least he has some sort of a plan. I hope I did the right thing for him as it looked like he didn't know who to turn to , and really it was just blind luck I happened to see him . I do not know him very well.

I had no idea this would happen. Any thoughts are appreciated.

i am not saying you were wrong

but since the market is in a mature bull run , i would have steered him towards investor education first ( unpaid stuff first , so he will know good advice when presented to him , or when 'to go it alone ' )

unless the man is already ill , he still has time ( but must understand the urgency needed when the GO button is pushed )

i decided to start planning very late 2010 , and despite being forced to stop work in 2017 , i probably had 'done enough ' to give me a narrow comfort buffer ( which i am still trying to improve and tweak )

now the yield curve inversions hint of a major event next year , being educated and some cash reserves might be all the edge he needs to grab that narrow comfort buffer

i would also suggest he bring his family into the loop in investing research and decisions multiple eyes and minds can sometimes give good insight ( to small opportunities , the broker needs big investment niches to say put in $200,000 on behalf of clients to make it profitable )

 

[brett]

So often it comes down to the ability to discern between wants and needs and having the personal discipline and basic smarts not to pay for wants with consumer credit or loans.

 

[Ducati52]

I think I would steer someone in this situation towards Dave Ramsey. While I certainly don’t agree with all of his philosophy, I think he’s a pretty good resource for someone who’s literally starting at square one. The broker/IRA seems more like step 5 or 6, when he really needs to start at step one.

However, please don’t take this as a criticism of your actions, which were very kind. Most would simply respond with something like, “spend less than you make” or “get a better job.”

 

[MarieIG]

The other thing that is scary about his situation is if he is a small businessperson, he may not be declaring all his income. This saves money today, but at retirement he may be in for a surprise at how low his social security benefit is if this is the case. Hopefully he has been paying into social security.

It happens a lot. I see lots of UBEER drivers for example, after they write off the mileage there is basically no taxable income left.

You have a point. There is a tremendous underground economy without a large number of people paying no tax on their income or declaring much less than they actually earn.

 

[samclem]

If he saves $100/month from now until he is 70 in 20 years and it earns 6%/year then he'll have $46,205 at age 70.

Those might turn out to be some fairly optimistic assumptions, but not impossible. Anyway, painting a gloomy picture probably won't help his motivation.

. . . he'll have $46,205 at age 70.... at a 4% WR that would be $154/month.

This might be a case where an annuity makes sense. Today a 70 YO can use $46K to buy a lifetime check of $288/mo. Sure, it will lose value to inflation, but it still starts at nearly twice the monthly check that a 4% WR would provide. Anyway, at the time, it could be worth looking at an SPIA and even SPIAs with a CPI adjustment.

Yes, waiting to take SS will be a big help.