How to make up lost ground if you got a late start saving for retirement

March 24, 2021

There are many reasons older Americans are financially ill-prepared for retirement. 

Some people don’t make enough money to set aside for their later years. Others have bad luck in their career, poor financial role models, bad personal-finance habits or a lack of knowledge about money management. 

As someone with three young children, I can also see how many parents would put their kids first with spending priorities. It turns out, only 43% of American workers take part in a retirement-savings plan.

Whatever the reason, many people wish they had started saving when they were younger, but didn’t. Beginning the savings process at a younger age offers huge compounding benefits.

For example, if a 25-year-old put $10,000 in a stock index fund and added $500 a month until age 65, he or she would get $2.34 million. The 9% long-term historical average annual gain for U.S. stocks would compound over four decades, despite the fact that only a total of $250,000 was added to the fund in that span.   

If you got a late start, or just want to stretch your nest egg, you may think that taking on riskier investments — more technology stocks, for example — will get you to your goal.

But focusing on saving rather than investing when you’re older might be the more prudent choice.

As we mentioned, compounding investment returns over long periods is a surefire way to retire comfortably. For example, assuming you begin saving $500 a month at age 25 and stop saving at age 35, with a 7% annual return you would end up with about $720,000 at age 65. If you instead began saving that same amount at age 40 and kept saving until age 65, earning 7% annual returns would net $412,000.

While beginning the process of saving for retirement in your 40s or 50s isn’t ideal, it isn’t a lost cause either. 

Playing catch-up

If you got a late start on retirement planning, there are steps you can take to fund your post-working years. You have to make some potentially uncomfortable moves and stop wasting time. The best time to start saving was 10 years ago, but the second-best time is today. Don’t be discouraged if you’re in this place. Many people in this same situation give up, saying it’s too late, but that’s not the case.

Older savers actually have potential advantages. They’re in the peak earnings years, and the kids are often out of the house and off the parental payroll. As a result, there’s extra money to funnel into savings. For those who’ve paid off their mortgage, there’s even more money to be redeployed. And the government offers catch-up provisions to employees over the age of 50 — as of 2020, that’s an extra $6,500 in a 401(k) and an extra $1,000 in an IRA on top of the standard contribution limits.

You might be tempted to shoot for the moon and take on tons of risk with your investments to play catch-up. But saving money is still far more important than how you invest in a period that spans 10 to 20 years before retirement.

Saving vs investing

Let’s assume Carl and Carla Carlson are 50 years old, with little retirement savings. The kids are mostly independent, so they can supercharge their savings to make up for lost time. Carl wants to take on more risk to make up for their shortfall in savings, while Carla would rather simply save more.

The Carlsons have a household income of $100,000, which will grow at a 2% cost-of-living adjustment each year. Carla expects their investments to compound at 6% annually and would like to save 20% of their income. Carl thinks he can do much better than that by trading stocks and saving a little less. Carla thinks Carl is overconfident. 

Trading stocks is usually a money-losing proposition for the average investor. A widely cited study by professors at the University of California showed that active traders massively underperformed an index fund, such as that of the S&P 500
and those who traded the most had the worst returns.

The Carlsons want to retire between age 65 and 70 but are unsure how far their savings can get them in such a short time. This is an example of their current plan, one with a higher savings rate and one where Carl’s stock picks knock it out of the park:


Even if Carl doubled Carla’s 6% return target, a higher savings rate would have led to better results. A doubling of the Carlson’s savings rate from 10% to 20% produced a better outcome than a doubling of their investment returns from 6% to 12%, even over two decades. And chances are Carl is not the second coming of Warren Buffett, so increasing the savings rate is far easier than increasing investment returns. 

A balanced approach

Many people who begin saving late assume they need all of their assets in the stock market to make up for lost time. But you can still have a more balanced portfolio that includes real estate, bonds or cash as long as your savings rate is ample enough.

Taking on more stock market risk doesn’t guarantee better results. The market won’t give you good returns just because you need them. Your savings rate is something you control, while no one controls the returns thrown off by the financial markets. A more likely scenario is that, by taking more risk, Carl would actually harm the performance of the couple’s savings because the track record of professional, let alone amateur, stock pickers is poor.

Saving at an early age is important because it helps you build solid financial habits and enables compound interest to snowball your money over time. But saving is probably even more important for those who are behind on their retirement savings because you don’t have as long to allow compounding to do its thing.

Embracing work

Now this doesn’t mean your time horizon as an investor is done the day you retire. According to the Social Security Administration, a couple retiring today has a 50% chance that at least one of them will live into their 90s. You could still have two to three decades to manage your money during post-work years. It’s just that your time as an earner and saver may have a shelf life if you don’t work during retirement.

There are other ways for Carl and Carla to extend the life of their portfolio. Investment expert Charles Ellis found that delaying your retirement from age 62 to age 70 could reduce your required savings rate by more than 50%.

Working longer not only enables you to save more money, it lets compounding do its thing, lowers the number of years your portfolio needs to last during retirement and potentially allows you to delay taking Social Security payments. Delaying Social Security benefits from age 62 to age 70 can increase your monthly benefit by more than 70%. Not everyone wants to work longer, but for those who are willing and able, it can drastically increase your odds of success in retirement.

Ben Carlson is a portfolio manager at Ritholtz Wealth Management LLC

This article is adapted from his most recent book, “Everything You Need to Know About Saving for Retirement,” published in November.