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If you're in your 50s and haven't started seriously investing for your retirement, time is rapidly running out. Compounding can't work the magic for you that it could have worked had you started earlier, but all hope is not lost.
If you're able to save aggressively and use the retirement plan catch-up provisions available to you once you've reached 50, you can still build a respectable nest egg. But you have to get started now.
Why your 50s are so important for retirement
Once you turn 50, you become eligible to put thousands of additional dollars away in your qualified retirement accounts, above and beyond what younger workers can invest. The catch-up contribution amount is $6,000 in your employer-sponsored 401k, 403b, or TSP plan and $1,000 in your IRA. That's $7,000 additional that you can sock away over the standard limits of $18,000 for the employer sponsored plan and $5,500 in your IRA.
Add that all up, and you're likely eligible to contribute a total of $30,500 per year in your tax-advantaged retirement accounts once you've reached age 50. If you're starting from scratch, that may seem like an incredible amount of money to come up with. Still, if you want a comfortable retirement and you're starting from scratch in your 50s, it's not a bad target to try to reach.
In addition to those higher limits, you do have other advantages in your 50s that you may be able to leverage to help you retire comfortably:
- You may be in your peak earnings years. In your peak earnings years, you will be earning more than you're earning at any other time in your life. That gives you both a better opportunity to save and an obligation to your future self to save. After all, it's easier to choose to live on less in your peak earnings years than it is to be forced into a lower cost lifestyle when your income declines.
- Your house may be paid off. Once your mortgage gets paid off, you free up the money that had been going toward principal and interest, and you may be able to get better terms on your homeowners insurance, as well. Money you're no longer spending on your mortgage is money you can directly put toward your retirement plan.
- Your kids may be grown. It costs nearly a quarter of a million dollars to raise a child from birth to age 18, and even more if you're helping out with college expenses. But once your kids achieve independence, the costs of raising them are ones you no longer have to cover. That's money you free up to invest toward your retirement.
How $30,000 per year can add up to retirement comfort
If you are able to take advantage of being age 50+ to more or less max out your retirement plans, you still have a chance at a solid retirement -- but, absent winning the lottery or an unexpectedly large inheritance, it really is your last chance. The first chart below shows what you can end up with if you sock away $2,500 per month ($30,000 per year), depending on the number of years you've got left at work and the rate of return you earn:
|
Years to Go |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
20 |
$1,898,422 |
$1,472,551 |
$1,155,102 |
$916,937 |
|
15 |
$1,036,176 |
$865,096 |
$727,047 |
$615,226 |
|
10 |
$512,112 |
$457,365 |
$409,698 |
$368,125 |
|
5 |
$193,593 |
$183,692 |
$174,425 |
$165,747 |
Source: Author's calculations.
Once you do switch from working to retirement, that nest egg can help you cover your expenses. The chart below shows how much per month that nest egg can generate based on the 4% rule, depending on the number of years you saved and the rate of return you earned:
|
Years You Saved |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
20 |
$6,328 |
$4,909 |
$3,850 |
$3,056 |
|
15 |
$3,454 |
$2,884 |
$2,423 |
$2,051 |
|
10 |
$1,707 |
$1,525 |
$1,366 |
$1,227 |
|
5 |
$645 |
$612 |
$581 |
$552 |
Source: Author's calculations.
Notice how quickly the numbers drop off as the time you have left to save decreases, no matter what rate of return you earn? That's why your 50s very likely represent your last, best hope for a comfortable retirement. If you start later, you simply don't have the time to build the nest egg you need to cover your costs in your golden years.
As for why that 4% rule matters: it's a back-tested guideline that suggests that if you have a diversified, well-allocated retirement portfolio, you can:
- Take 4% of your portfolio's starting balance as your first year's income,
- Increase your withdrawal by inflation each year after that, and
- Have a strong likelihood of seeing your retirement money last at least as long as you do.
You must get started now
Life may have gotten in the way of saving for retirement earlier, but once you've hit age 50, saving for your retirement becomes a far more urgent goal. You'll never again have longer to save for your retirement than you have today, which makes right now your best chance to get started.
