7 Advantages When You Start Saving For Retirement Late

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Everyone knows they should start saving for retirement as soon as possible. What people know they “should” do and what people actually do is not the same thing. According to AARP, nearly half of American households headed by someone age 55 or older have no retirement savings.

Picture of watch and money indicating getting a late start saving for retirement

What is someone far behind on retirement savings to do? Can they learn anything from the FIRE (financial independence, retire early) community?

The “simple math” of FIRE allows people who start saving aggressively in their 20’s to achieve financial independence in 10-15 years and be financially independent by their 30’s to early 40’s. The math is identical if you start saving in your 50’s to reach financial independence at traditional retirement age.

It’s hard to drastically change decades old behaviors if you haven’t saved earlier in adulthood. That’s fair.

I want to share a counterpoint to give hope if you’re getting a late start saving for retirement. It is possible to apply these FIRE principles later in life. In fact, late savers have several key advantages that early savers do not.

Dissecting the Simple Math

Achieving financial independence quickly is primarily a function of your savings rate. The greater your savings rate, the faster you become financially independent. 

Many people erroneously think achieving financial independence requires great investing prowess. The shorter your journey to financial independence is, the less time investments have to compound during this process. 

This is not to trivialize investing. It will play a vital role in making your money last while supporting spending needs after achieving financial independence. Investing just needs to be placed in its proper place.

Savings rate is what you must focus on if you want to achieve financial independence quickly. Your savings rate is simply the amount of money you save divided by the amount you earn.

In equation form this looks like:

Savings rate = Savings/Earnings

Or:

Savings rate = (Earnings – Spending)/Earnings

Only two things really matter if you want to achieve financial independence quickly… how much you earn and how much you spend. Many people who begin saving later in life have several big advantages over younger savers in these two domains.

#1 Saving During Your Prime Earning Years

One of the two factors that go into creating a high savings rate is your income. So it should be easier to save when you earn more. Earnings peak for most workers in their 40’s and 50’s. This creates a clear advantage for people who are saving for retirement later in life. 

In our household, we reached financial independence quickly by saving roughly 50% of our household income. We lived on Kim’s income. My income was used to pay off debt quickly. Then we invested it.

The simple math worked, but it wasn’t easy. We started this system paying off debt when Kim was starting out with a salary of about $35,000. I was earning $10-12/hour working part-time while in graduate school. This required a frugal lifestyle.

Things got much easier when I began collecting a professional salary as a physical therapist. It became easier still when we both grew our salaries over the ensuing decade.

Still, we started cutting back our income just as we were approaching our peak earning years. Kim cut back to part-time work when she was in her mid-thirties after our daughter was born. I completely left my career at the age of 41.

Applying FIRE principles early in life means saving a large percentage of your income before reaching your peak earning years. Early retirement results in leaving a lot of career earnings on the table. Late savers, on average, have a clear advantage of saving during higher earning years.

Earning is only half of the savings rate equation. Spending is the other key factor. Late savers may have key advantages here as well.

#2 Empty Nests 

One of the biggest expenses many of us have is raising children. Younger savers have to figure out how to save for their own financial independence while also figuring out how to support children; from buying diapers and safety accessories in the early years, to supporting expensive hobbies and filling bottomless stomachs that characterize the teen years, to preparing for the massive expense of college education.

For many people in their 50’s, their children are out of the house. For others, kids are in their teen years. Many expenses are in the rearview mirror, and there is some certainty on what the next phase of life looks like. As your children get older, this creates several advantages to earn more and spend less.

As children become adults, the expenses of their food, utilities, and clothing go away. Some parents save for their children’s college education over many years . Others cash flow it from income when the time comes. In either case, once that phase ends it frees up substantial cash flow that can be redirected to your own retirement savings without sacrificing lifestyle.

Children growing up does more than free up cash flow. It frees up time. Tim Urban’s powerful blog post The Tail End points out that by the time a child graduates high school, they’ve spent 93% of the in person time that they will ever spend with their parents in their lifetime. 

The Tail End is a powerful read. It provides a graphic reminder to be careful how you spend your precious time.

This idea can be a little depressing. But it highlights a key advantage that allows late savers to catch up. You can utilize that freed up time to increase your earnings.

#3 The Ability to Downsize

The biggest monthly expense for many households is the rent or mortgage payment. Related to your kids growing up and moving out, this could be a great time to downsize your housing.

The idea that we “needed” bigger houses in the first place is mostly a function of marketing. Many households could downsize at any time and still live comfortably.

Dave at Accidental FIRE analyzed housing trends. He found that in 1951 the average American household contained 3.34 people and the average new home construction was 874 square feet. By 2017 the average household size decreased to 2.54 people while the average new construction size increased to 2,660 square feet. Over the past 70 years, we have more than tripled the square footage per person in the average American household!

Downsizing housing expenses is one of the most impactful levers we can pull to drastically reduce spending. All things being equal, smaller houses tend to be less expensive, have lower property taxes, and cost less to heat and cool.

As our children get older and move out, it provides a great opportunity to downsize. That is another advantage for those who need to catch up on retirement savings compared to younger savers whose household size is stable or growing.

#4 Catch Up Contributions

We all realize that housing is a big expense. A rent or mortgage payment leaving your checking account every month is a stark reminder.

For many households, an even bigger expense is income taxes. This is easier not to notice for most of us because we don’t write this check every month. It is automatically deducted from our paycheck before we receive it.

Many people don’t even think about income taxes because they think they are inevitable and out of their control. In reality, we have a lot of control over how much income tax we pay.

Traditional Retirement Accounts

Most people who are saving aggressively for retirement can use simple timing strategies to decrease your tax burden. You can defer taxes that would be paid in higher income tax brackets in your peak earning years. Instead, pay the taxes in lower tax brackets after retirement when income is generally lower. This is done by using tax deferred retirement accounts such as a 401(k) or Traditional IRA.

The Roth Option

Some people are confident that they will pay more income tax in retirement. For them, Roth versions of these retirement accounts make more sense. With Roth accounts, you pay income tax in the year of the contribution, but distributions are not taxed.

Tax Free Growth

Both tax-deferred and Roth accounts allow your investments to grow tax free between when the money is deposited and withdrawn. This saves capital gains taxes that would be paid annually on a taxable investment account.

Tax Advantages for Older Savers

Regardless of whether tax-deferred or Roth accounts make more sense for you, it is wise to put as much money into these tax advantaged retirement accounts as possible. This is true even if you want to retire early. But early retirees have to devise a strategy to create enough income to live in retirement without incurring early withdrawal penalties. Late savers who will retire at a standard retirement age don’t face this challenge.

The IRS allows “catch up” contributions to be made by those age 50 or older. In 2020 and 2021, individual contribution limits to 401(k), 403(b), and 457(b) accounts are $19,500. The catch up contribution for those 50 and older is an additional $6,500 for a total contribution limit of $26,000 per person.

Traditional and Roth IRA contributions limits are $6,000 per person. The catch up contribution for those 50 and older is an additional $1,000, for a total limit of $7,000 per person.

Individuals who can max out contributions to both work and personal retirement accounts can contribute $7,500 per year more than younger individuals. Households with married couples could potentially contribute up to $15,000 more than younger couples. This is a massive advantage to those who are starting to save for retirement late.

#5 Decreased Longevity Risk

We almost always think of having more life left to live as a good thing. Retirement math is the exception. In retirement planning, the term longevity risk means your life may last longer than the money you have to support living expenses.

We certainly want to live long healthy lives, but we must acknowledge that doing so presents a challenge. We need to make our money last longer.

The late saver who can not retire until the traditional ages of 60 to 70 should still plan on a retirement that can last 30 years or longer. The FIRE practitioner, like myself, who starts saving aggressively in their 20’s and leaves their career in their early 40’s essentially must plan for two consecutive 30 year retirements.

Early FIRE bloggers took retirement research that looked at the 30 year retirement assumption and extrapolated out that this could be applied to an indefinite retirement period. “Big ERN” at Early Retirement Now pushed back on this assumption with his Safe Withdrawal Rate Series. He found that early retirees should probably assume they can start retirement taking closer to 3% from their portfolio annually than the “4% rule” that is the starting point for traditional retirement planning.

One percent seems insignificant at first glance. A person who is taking 4% from their portfolio would need to save 25 times their annual spending. Someone taking only 3% would need to save 33 times their annual spending.

If you spend $50,000/year, this is a difference of $400,000 less someone with a traditional retirement time frame needs to save compared to someone saving for FIRE. This is an advantage for the late saver. A shorter retirement time span requires a smaller portfolio to support it.

#6 Social Security Fills the Gap

Once you determine how much you want to spend in retirement, you need to find a way to produce income to cover those needs. Someone pursuing FIRE needs to save enough money so their portfolio covers all of their spending needs. Alternatively, they can fill the gap between spending needs and income produced by their portfolio with income from other sources such as rental real estate, royalties, or part-time work.

If you are getting a late start saving and won’t be able to retire until traditional retirement age, your portfolio doesn’t need to support all of your spending needs in retirement. You only need to save enough to fill any gap between your spending and the income social security provides.

You can still apply the principles of FIRE to develop a high saving rate later in your career. Working longer provides two advantage over someone pursuing early retirement. Social Security will be available sooner in your retirement. Your benefits will also be greater than if you retire early

Social Security benefits decrease the amount a traditional retiree needs to save in order to retire securely. This provides a great advantage for the person who starts saving late over someone saving to retire early.

#7 More Certainty With Health Insurance

In writing this  early retirement blog, rarely a week goes by that I don’t get the question, “How do you afford health insurance if you’re not working?” I share resources including a:

Invariably, the question comes back to, “No, what are YOU doing about health insurance?” I have to admit, I haven’t found a satisfactory solution for medical insurance that I’m confident will work for the next 20+ years until we reach Medicare eligibility. We’re winging it, planning one year at a time.

An early retiree must save tens to hundreds of thousands of dollars extra to be able to pay full unsubsidized insurance premiums until they reach Medicare eligibility. Alternatively, we could take on the political risk of relying on ACA subsidies. 

Those with preexisting conditions must also take on the risk of financial ruin if they can’t buy insurance at all if the law changes. All of these are reasonable possibilities for people bridging the gap between employer provided health insurance and Medicare in America.

Medicare is not free. Medicare is not perfect. But it provides certainty and stability for someone who is saving for retirement at a traditional age. Neither is available to someone working towards FIRE. 

A traditional retiree can get a reasonable estimate of how much you need to save to pay premiums. You have assurance you will have quality insurance that will prevent financial ruin in a worst case scenario. These are big advantages for someone who starts saving late for a traditional retirement over someone who is saving to achieve financial independence and retire early.

You Can Do It

Summing up, achieving financial independence and obtaining a secure retirement isn’t easy. If it was, the FIRE community would not be a tiny subset of the population. The numbers for those approaching traditional retirement age I shared in the introduction wouldn’t look so grim.

Saving early and often is the best approach of achieving financial independence and a secure retirement. The FIRE movement is full of people who do this.

However, our stories are often presented in an extreme way that obscures solid principles that can be applied at any age. FIRE principles boil down to simple math and common sense.

Grow the gap between what you earn and what you spend to get your savings rate as high as possible. Do this by focusing on the big things that actually move the needle: increasing income and decreasing your biggest expenses including housing, transportation, food, taxes, and child care.

Most people who have not established a consistent habit of saving during their early working years will have difficulty changing decades old behaviors. It will take a change of mindset that results in taking new actions. That’s hard, but it is possible.

The person who starts saving later in life has some major advantages over someone like me who applied FIRE principles early in adulthood to radically change my financial future. If we can do it, more people can use the advantages described above to achieve a secure retirement … even if you’re getting a late start.

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[Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. After poor experiences with the financial industry early in his professional life, he educated himself on investing and tax planning. Now he draws on his experience to write about wealth building, DIY investing, financial planning, early retirement, and lifestyle design at Can I Retire Yet? Chris has been featured on MarketWatch, Morningstar, U.S. News & World Report, and Business Insider. He is also the primary author of the book Choose FI: Your Blueprint to Financial Independence. You can reach him at chris@caniretireyet.com.]

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22 Comments

  1. I was wondering whether investment in Real Estate, would be included in the savings equation on the savings side? I am 61 now and had maxed out all the other routes for tax delayed savings and received a large one time salary bump due to stock appreciation. I used it to purchase a vacation condo/second home/eventual retirement home. At the time, I saw this as a good way to have a second future source of income. Currently, though it pays for itself in upkeep, the return is pretty much breakeven or 1%. I keep wondering does this factor into my calculations as investment, part of the 3% or4% calculation. or should I just exclude it?

    1. Kevin,

      I would start with simplicity. What do you want to do with the two properties after you retire?

      Will you sell one? If so, you should have a decent idea what it is worth and how much you will net after a sale. Then consider that amount as part of your portfolio which you will use to produce income as part of your drawdown strategy.

      Will you keep the other property as a rental? If so, you can get a decent idea what cash flow it will produce every month. That is money your paper (stock/bond) portfolio won’t have to produce.

      This gives you a good starting estimate and conceptual framework. The next step would be to plug your numbers into a retirement calculator that allows you to get a more nuanced insight such as tax consequences, long-term impacts on your chances at success in not running out of money, possibility of a legacy at death, etc. You can click the links to the retirement calculators we recommend in the box at the bottom of the article. IMO, NewRetirement’s calculator is easier to jump right in and use. Pralana’s has more computing power and ability to customize more complex scenarios. Both are fine tools and great values.

      Hope that helps.

      Best,
      Chris

  2. Great and true post, Chris. It certainly describes what I did to retire at a usual retirement age of 62.

    I didn’t do much savings young. But even the very low 2-3% I put in company 401k’s, starting in my mid 30s, grew steadily over a few decades. I only started Roth contributions in my early 50s, encouraged by my financial advisor.

    At age 59, in 2016, I fired my longtime financial advisor and took control of my savings after reading JL Collins’ “The Simple oath to Wealth” 2 times. The book helped me realize that the advisor never encouraged me to save at very high rates, and his active investment funds earned me less than index fund investments.

    I moved my $325k in 401K and Roth savings from active to index fund investments with Vanguard, and also maxed out my 401k and Roth contributions for 3 years. After those 3 years, I had about $525k in investments and felt I could safely retire at 62, by paying monthly expenses using 3-4% annually from that $525k, plus $500/month from pensions from 2 jobs I had decades ago, plus $2000/month from early Social Security.

    It was critical, as you write, to know what I spent regularly. I still maintain the expenses spreadsheet that helps me know that my retirement income and a small percentage of my investments can support my spending needs.

    Healthcare is my biggest single expense monthly. I had estimated $1000/month to cover it all. The cost for COBRA coverage from my last job was lower, $750 for medical, dental, vision, and my medicine costs were $30/month on average. I’m lucky, now that COBRA is expiring, that I can get on my wife’s insurances for about the same cost. I’ve got 14 months more before I start Medicare and an advantage plan, and that change should decrease my monthly insurance costs by about half.

    So yes, being near or at Social Security and Medicare eligibility are big factors for us later retirees.

    You are so right, it’s never too late to apply FI principles to reduce spending, accelerate savings, and prepare for a “traditional” retirement date with greater personal confidence and security.

    Thank you and your FI colleagues fir all you do to help even us slow sloppy folks move towards a more solid retirement financial footing.

  3. Im envious of a friend of mine who has been successfully day trading with funds within his Roth IRA account. He’s telling me he’s up 40% this year. And to not have to pay a dime of capital gains from that gain is such a huge benefit it almost doesnt seem right.

    Im not advocating Day trading but wish I would have set up a Roth. 🙁

    1. Mitch,

      I still think for those with a high savings rate, whether saving toward FIRE or catching up for traditional retirement benefit more by using tax-deferred over Roth accounts. That said, we are happy to have our investments diversified about 50% tax-deferred and 50% taxable/Roth/HSA.

      Best,
      Chris

  4. Great insights Chris!

    There’s no question it’s better to start saving in your early years. The reality is lots of folks will be in the position of playing catch up. You’ve captured many excellent points underscoring how and why it’s not too late to start saving. The key is making a plan and committing to setting money aside. Great post!

  5. I kept thinking Chris will leave something out, after all this is a big and complex topic, and I’ll be able to add it in the comment section. But nope! You hit everything dead on. Nicely played. And nice that you are giving hope to people who might have felt it wasn’t worth even trying. They still have plenty of time but they need to start now!

    1. Thanks for the kind words steveark. And thanks for keeping me honest!

      I put a lot of thought into this topic b/c it’s very important to me & overlooked by many.

      Cheers!
      Chris

  6. Thanks Chris, you have been an inspiration and a teacher to this old guy.

    Although I am a “traditional” retiree I read your blog for ideas and understanding of retirement financing. While I didn’t start getting serious about funding my retirement until I was in my 50s. My spending obligations; child care, college, home purchase, cars, etc. were dramatically declining as my income was rising.
    I chose to not spend up to my new income but rather to live well within, even much below my means and invest most of the excess in simple Vanguard index funds. Of course I attempted to use all the low tax, high yield paths available to me to maximize my investments and their growth.

    I retired at 66, applied for medicare and social security and continued to live the same comfortable life I led before except no daily work schedule. Following the financial philosophy espoused in the caniretireyet blog I created a significant safety net for my wife and myself, and as it looks now for my kids too.

    You can use these ideas in your 40s, 50s or 60s to prepare for retirement. I tell others it is truly never too late to start, it is better and easier to start early but all is not lost if you didn’t.

    1. Thanks for taking the time to comment Luda. Hearing these stories is why I do this, so you put a big smile on my face today.

      Cheers!
      Chris

    1. I suppose it’s semantics to say which is not covering full spending needs and which is filling the gap. Thanks for reading.

  7. It is definitely never too late to start! I discovered FIRE & started my journey at 47. If everything goes to plan, I hope to retire at 55. You’ve covered all the advantages of starting late – I have one more to add – we are wiser in our ‘advanced’ age. We have lived experiences and know ourselves well – if we choose to pursue FI, we know our ‘why’ and will make it happen. After all, that retirement is looming whether we like it or not

    1. Congratulations on the turnaround! And thank for sharing your experience and wisdom.

      Cheers!
      Chris

Comments are closed.