Sure, sure, we’ve all heard it: Retirement planning should begin when we’re young. But what about those of us who have been forced by circumstances to wait? Is there no hope? The answer to that question is a resounding no. Here are three reasons it’s never too late to plan for the day you wave a final goodbye to your job.
1. Compound interest works — no matter how old you are
Some fortunate souls begin saving for retirement the day they enter the workforce, which is wonderful. With time on their side, they can watch the magic of compound interest at work. But the fact that somebody else started early in no way impacts you or how you also put compound interest to work.
Let’s say Sam is 55 and wants nothing more than to retire in 10 years. They’ve had some rough years, financially speaking, and have nothing put away for retirement. It’s not an ideal situation, but certainly not insurmountable. As any personal finance expert would tell Sam, “The best time to plan for retirement was years ago. The second-best time is today.”
Taking that to heart, Sam begins contributing $100 a week to their company’s retirement plan or an individual IRA.
Since 1928, the average annual return on the S&P 500 has been 7.7%. Some years it’s been lower, and some years it’s been much higher, so let’s say that over the course of 10 years, the money earns an average return of 7%.
By investing $5,200 annually ($100/weekly), Sam has nearly $72,000 tucked away by age 65. You’ll notice that without compound interest, they would have had $52,000 ($5,200 per year times 10). But thanks to the power of compounding interest, Sam’s investment has grown.
Compound interest benefits you the same way it benefits anyone else.
2. The older you are, the closer you are to “catch-up” contributions
If you’re enrolled in a retirement plan, the IRS allows you to contribute more to your plan. For example, the 2024 contribution limit for a 401(k) plan is $23,000. If you’re 50 or over at the end of the calendar year, you can make a catch-up contribution of up to $7,500 more. That means you can contribute up to $30,500 annually to the following:
- 401(k) — other than a SIMPLE 401(k)
- 403(b)
- SARSEP
- Government 457(b)
Even if you don’t believe you can possibly contribute more, every dollar you add to your contribution makes it easier to retire.
Let’s go back to Sam for a moment. Imagine that Sam decides they can contribute $150 weekly rather than $100. In 10 years, their retirement account would hold $107,800. It’s not a fortune, but it could certainly make Sam’s household budget a little easier to manage.
Don’t forget, you don’t have to withdraw all your money at once. Let’s say you only take the required minimum distribution (RMD). The rest of your funds can remain in your investment account and continue to grow.
3. You have a better sense of how much your guaranteed income will be
Guaranteed income is any source of income you can count on, month in and month out. It includes things like pensions, Social Security payments, and annuities. The Social Security Administration (SSA) determines a person’s monthly income using the “average indexed monthly earnings” for up to 35 years of employment (using the years with the highest earnings).
In most cases, the older you are, the longer you’ve worked, and the closer SSA is to providing you with an accurate estimate of how much you can expect to receive.
Why is this important? The nearer you are to knowing how much money you’ll have coming in each month, the easier it will be to come up with a budget that fits. You can sign up at my Social Security to receive an estimate of how much you can expect. It won’t be exact, but it’s close enough to allow you to figure out if you’re going to have enough or if you’ll need to alter your plans a bit. For example, you may decide to work a little longer, take on a side hustle to earn more money between now and when you retire, or downsize your living situation in retirement.
If you tend to be an all-or-nothing, black-and-white thinker, it may be tough to wrap your mind around the idea of starting to save for retirement today — no matter how old you are. But every dollar you put away for your retirement years will only serve to make your golden years easier.
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