Retirement Catch-Up at 50 and Older

It’s not as hard as you think.

Discovering that you’re not on track with your retirement savings in your 50s can be unsettling. But it’s far from a lost cause. Let’s explore how you can still achieve a comfortable retirement.

You may have read or heard that most Americans aren’t saving enough for retirement, and been shocked to find yourself among the group considered behind schedule.

This frequently happens to people in their 50s, and it makes sense. In our twenties, the financial focus is on student loans and settling other debts accrued in college, alongside initial efforts to finally sock something away. Our thirties frequently switch us over to homeownership as a primary financial goal and starting a family in that new home. Our forties put financial focus on the kids, preparing funds to send them to college.

It’s in our 50s when we can finally come up for air, look around at the house nearly paid off, cars in the garage, college funded, vacations enjoyed, and a home theater that’s one popcorn machine away from rivaling the local cinema. But, say ominous articles, you can’t retire on a flat screen and the tail end of mortgage payments. You need money, and a lot more of it than you’ve set aside. Then, inevitably: “The clock is ticking.”

Don’t panic! Whether you’re 50 or older, there’s plenty you can do to catch up. You might not need as much as you’re told or you think, and with an intelligent investing plan, your savings can grow to the amount you need when you stop working.

It’s Not As Late As Advertised

For starters, with most of your big life expenses in the rearview mirror, you should have more money to devote to retirement, and you’re not alone.

For the purpose of helping late-starters catch up, Congress enacted catch-up payment capabilities in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Starting at the age of 50, you can add $1,000 more to your annual IRA contribution, and $7,500 more to your annual 401(k) contribution. In 2024, these will amount to:

2024 Retirement Contribution Limits
IRA — $7,000 plus $1,000 catch-up
401 — $23,000 plus $7,500 catch-up

These might seem like small additional amounts, but the extra $8,500 per year, growing at a conservative 6% annually, would become $198,000 in 15 years. That’s on top of growth of your base contributions. Even if you started from zero today, but maxed out your contributions for the next 15 years and grew them at the same conservative 6% annual rate, you would end up with $896,000. Because future contribution limits are likely to rise, you could reasonably expect to retire with $1M — even if you’re just now starting. That’s encouraging.

Divide the above contribution limits by 12, and you’ll get a monthly contribution amount of $3,208. You can probably swing that. The average American monthly mortgage payment was $2,605 last summer, according to Redfin. You’re probably not paying that, because you bought your house long ago and refinanced at less than 3%. Your past smart money moves freed up extra cash in your budget, and for just 23% more than the price of a 2023 mortgage payment, you’ll retire in style.

Stocks Can Return More Than Advertised

While it’s wise to stay conservative when estimating, it’s also comforting to know that you can probably do better than advertised.

Stocks have historically returned about 10% per year. A conservative investment mixture is natural later in life, hence the 6% assumption above. But if you’re playing catch-up, a more aggressive approach could make sense — and need not be reckless.

A highly focused, rules-based portfolio, using index funds only, can run circles around historical performance. Nothing comes for free, of course, so such high performance necessarily involves high volatility. This can be unnerving for some investors, but in the context of needing to make up for lost time, a more conservative approach is a ticket to failure. It’s not “safe” to miss your goals.

Most advisors are simply wrong when they push diversification. “Don’t put all your eggs in one basket” goes the aphorism, but spread your eggs too far and none of them will hatch. To beat the market, you have to focus and go bold. Doing so can boost performance dramatically.

For example, The Kelly Letter’s high-growth 9Sig plan has achieved a 34.8% annualized return on investment from January 2017 to the beginning of this month. I created it for the express purpose of helping subscribers who told me they were starting late and needed to get ahead in their retirement investing. Boy have they!

9Sig uses just two funds, a 3x leveraged stock fund and a general bond fund, and rebalances the stock fund to a growth target each quarter. This is not rote rebalancing, such as to a 60/40 mixture, but growth target rebalancing, which works better. In the 6.9 years since 9Sig debuted, it has gone through big ups and downs. The main drawdowns were the tech wreck of autumn 2018, the covid crash of 2020, and the Fed rate-hike panic of 2022. Despite these, the plan’s rules-driven quarterly buys and sells have achieved an annualized return of 34.8%.

If we get conservative and assume a 15% growth rate going forward — less than half of what the plan has achieved, but 50% more than the stock market’s historical growth rate — the 9Sig plan could work wonders with your maxed out retirement contributions.

Using the above figures, your maximum retirement contributions grown at 15% per year would turn into $1,833,000 over the next 15 years. That’s almost $1M more than at 6%.

The usual caveats apply: mileage will vary, who knows what the next 15 years will bring, and not all retirement accounts offer the funds needed to run the plan, but the salient point here is that it is possible to do better than historical market returns — without exotic investing techniques or luck-based trading.

Show this to any advisor and they’re sure to roll their eyes and say it’s not possible, but The Kelly Letter proves that it is. So do emails from overjoyed subscribers preparing to retire. Average advice begets average returns. Better results require a better approach.

Even if you don’t pursue a high-performance strategy such as 9Sig, just focusing on the market’s historical 10% annual pace is enough to provide a fine retirement. Putting everything in the S&P 500 via SPY, with perhaps a little price opportunism via value averaging (adding less when the price is up and more when it’s down), should achieve close to 10% annual returns. That rate would turn your max contributions into $1,224,000 over the next 15 years.

A sizable retirement fund is not out of reach. Max out your contributions into a plan focused on the stock market, and you should be fine.

You Can Save More Than Advertised

If you’re willing to take a few extra steps, and you qualify, you can save a lot more than shown in the above contribution limits.

A Simplified Employee Pension Plan (SEP) offers a robust avenue for retirement savings, enabling employers to allocate funds into retirement accounts for themselves and their employees. “What does this have to do with me?” you’re thinking. Well, even self-employed people can open one and count only themselves as an employee, and you’re self-employed even if yours is a side business. You don’t have to own a major operation to qualify.

SEPs present minimal start-up and operational expenses compared with traditional company retirement plans. All the big brokerages offer them, and they come in an IRA flavor, with the tax advantages of a typical IRA: earnings are tax-deferred and contributions are tax-deductible.

Here’s where it gets incredible: The contribution limit for a SEP-IRA is $66,000 this year, and $69,000 in 2024. At a big brokerage firm, your SEP-IRA would offer access to a wide variety of funds, including the ones used in The Kelly Letter’s Sig plans.

So, if you’re in the enviable position of having a lot more money that you’d like to put toward retirement in a tax-advantaged account, consider looking into a SEP-IRA at Fidelity, Schwab, Vanguard, or other big brokerage firm. (See Sources, below, for links.)

Finally, you can always save in a traditional brokerage account. It won’t bring tax advantages, but you don’t go broke paying taxes. They’re a fraction of what you earned. If you’ve reached your tax-advantaged contribution limits, and still have more to save, consider doing it in a traditional brokerage account, where almost every stock-market security will be available to you.

We’re approaching a new year, my friend, and there’s plenty of time for you to put in place the process you need to create the retirement you want. Don’t let anyone tell you otherwise.

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SOURCES

Wikipedia
Economic Growth and Tax Relief Reconciliation Act of 2001

Investopedia
Catch-Up Contribution: What It Is, How It Works, Rules, and Limits

SmartAsset
Investment Return & Growth Calculator

Kiplinger
Mortgage Payments Spike Nearly 20% From a Year Ago

The Kelly Letter
Current Performance of Sig Plans

Fidelity
SEP-IRA

Schwab
SEP-IRA

Vanguard
SEP-IRA