The Late Planner's Guide to Retirement Catch-Up

The Late Planner's Guide to Retirement Catch-Up

James O'Brien

We tend to think that every smart and successful retiree began his or her savings plan early on, dutifully funneling an annual percentage of their income into a 401(k), starting with their first job. And when those of us who don't fit that bill reach the age of 50 and realize we've saved very little by comparison, we may panic.

We'll outlive our money. Disaster and poverty will ensue.

The truth is, however, that late-start retirement savers can begin at 50 and still make a fine go of it. But they'll have to be more proactive, and maybe work a bit longer, given the shorter time frame they have to work with.

Let's look at how seasoned professionals can make a positive financial future out of their post-work years -- how much to save, when to begin, and what "catching up" through later retirement planning really means.

Retirement planning after 50
The first thing to do when putting together a later retirement plan is to understand what you'll need to have in your account so that you can live with reasonable comfort after you stop drawing a salary.

Recent reports on the University of Michigan's Health and Retirement Study, issued by the Institute for Social Research, put the median retirement-spending number at about $31,000. In our model, we'll bump that up to $36,000 -- that's $3,000 per month for our retiree.

Next, the rule of thumb among most financial analysts is that retirees shouldn't withdraw more than 5% from their account in any given year. That means that to draw a monthly income of $3,000 for 20 years, you'd need to have a minimum of $720,000 in your account.

So the goal is set. The next step is how to get to it.

Our example works like this: Our retiree has managed to grow their neglected retirement account just slightly over the years. They have $50,000 in a 401(k) at age 50, and they've recently taken a new job at $100,000 per year. That salary is higher than the median salary in the U.S. -- which is about $51,000  -- but it's representative of a professional who has worked for a long time and has advanced beyond the median throughout the course of their career.  

Our retiree's employer matches the first 6% of their deferred contributions at $0.50 on the dollar, and the employee expects to get a 3% salary increase every year. And we'll assume a 7% annual rate of return for the 401(k).

Assuming there are no drastic changes in the above variables, and including all of the increases and rates of growth we've outlined, our employee would have to contribute 11.5% of their paycheck to get to the goal of $724,000 in 17 years (at an average contribution of about $1,260 per month, if one divides their total elective contribution -- some $258,000 -- by the 204 months in 17 years.

Their elective contribution represents the base of the account. To this we add the annual returns on those investments, the annual salary increase, and employer matching. (You can project the growth of your own contributions with one of the numerous 401(k) calculators available online. For this article, we used one found at Bankrate.com.)

Now, let's look at some ways to help boost those savings even more -- and to get you to $720,000 without having to shell out 11.5%.

Make late planning count for more
The majority of U.S. workers contribute an average of just 5%-7% of each paycheck to their 401(k)s, according to a recent American Benefits Institute report.

In our model, to make the goal of a $36,000 annual retirement income, our late planner has to approach their retirement investment with alacrity -- an 11.5% contribution. Conversely, if they maintained the upper range of the average -- i.e., 7% -- they'd end up with about $589,000 at 67. That would produce a monthly income of about $2,450 at a 5% withdrawal rate in retirement.

Since our goal is to get above the median retirement income, stretching to the higher contribution percentage is one way to make it possible. But there are better scenarios yet. The following two strategies can powerfully alter the scenario for savvy savers.

  • Invest in lower-cost funds. One way to push your retirement account further is to spend less on the managing of the funds that help grow it. Some analysts suggest investing in index funds, citing their ability to perform well and incur lower management fees. If you can reduce your investment expenses by even 1%, think of it as tantamount to adding 1% to your 401(k)'s rate of return. Our model retiree could cut their 401(k) contribution to 9.5% across those 17 years to finish with almost $719,000 at age 67.
  • Work longer. The U.S. labor force is increasingly composed of people working past the age of 65. One of the correlations experts can make is that people are living longer and staying healthier as they age. If our late planner is still able and willing to keep working, simply staying in their position until age 70 would boost their end account to nearly $1 million at the 11.5% contribution level. And here's where it gets even better: Cut the contribution to 7% and work until you're 70, and you'll likely hit your $720,000 mark -- almost $729,000, based on our model. Combine delaying retirement until 70 with saving 1% on fund management fees? You could end up with more than $828,000 in your account.

The bottom line is that late planning isn't disastrous; it just takes some extra effort, discipline, and savvy.

The key is to start now and to base your account goals on a realistic monthly income after you leave work. From there, it's about how much you can bump that percentage up every year while cutting expenses (and contributions, if you're so inclined and able). The more you commit to the planning process, the more you'll take away from your working years when they're over.