Tips for Late-Start Retirement Savers

Susan Dziubinski: Hi, I’m Susan Dziubinski with Morningstar. The stock market has rallied over the past decade-plus, but many investors feel they are playing catch-up to save what they need to to have for retirement.

Joining me today to share some tips for people in this situation is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning.

Hi, Christine. Thank you for being here today.

Christine Benz: Hi, Susan. It’s great to see you.

Dziubinski: For those people who feel like they’re woefully behind when it comes to saving for retirement, some of them plan to just keep working. What are the pros and cons of that approach or that thinking?

Benz: Well, it’s certainly a winner from a financial standpoint. If you’re able to keep working, you can keep earning a paycheck. That means that you’ll need to be drawing upon your portfolio for fewer years, you may be able to continue saving. And you also may be able to delay Social Security, which can be incredibly impactful because that’s an enlarged lifetime benefit that you’ll be able to draw upon. So, it’s impossible to dispute the value from a financial standpoint.

The big roadblock, however, is that many people who plan to retire longer cannot do so due to their own health considerations, due to employment considerations. It might be spouse or parental health considerations that forced them out of the workforce earlier than they expected. In fact, our former colleague David Blanchett did some research that I often think about where he explored the disconnect between people’s stated retirement dates and their actual retirement dates. And what he found was that people often over-expected themselves to continue working longer than they were actually able to do. They retired earlier than they expected. So, I would bear that in mind for people who say, “Well, my plan is just to keep working till I drop, or to work as long as I possibly can.” It may not be possible.

Dziubinski: And you argue that it’s not too late to turbocharge your retirement savings. How can someone go about doing that?

Benz: Right. I keep thinking back to this piece that financial-planning guru Michael Kitces wrote several years ago, where he talked about how this is a worthwhile strategy, especially for empty nesters who have college in the rearview mirror. Maybe they’re not going to be purchasing new houses anymore. Some of these big expenses that can weigh on us in our 20s, 30s, and 40s are behind us when we hit our 50s and 60s. And so those are great years where you can supersize your retirement savings. You often have a two-earner couple at that point where in the past you perhaps just had one spouse who was earning a salary. So, there are some hopeful signs for people at this life stage where they can save more in their retirement accounts. They can also turn to nonretirement accounts to really put away a lot for retirement and make up for lost time.

Dziubinski: Christine, from a practical standpoint, at this point in life, you’re also able to make larger contributions to some of your tax-sheltered accounts, right?

Benz: That’s right, Susan. And that’s such an important point–that to an IRA you’re able to make an additional $1,000 contribution. To a 401(k), 403(b), 457–it’s even more generous, it’s $6,500 additional dollars you can contribute for 2021. You’re also able to make additional health savings account contributions once you cross age 55. So those are things to take advantage of. 

And then also bear in mind that if you are supersizing your retirement account contributions, you don’t have to stick with those retirement accounts. You can also use a taxable brokerage account. And there are no contributions on such an account, obviously, and you can invest really tax efficiently there as well. So, you can use exchange-traded funds for your equity exposure, municipal bonds or municipal-bond funds for your fixed-income exposure. So, there is really an opportunity to obtain a lot of the tax-deferral characteristics by investing tax efficiently inside of a nonretirement account.

Dziubinski: Let’s pivot a little bit and talk about, specifically, the investment part of this now. The stock market has rallied, and so you can see where people who might be in the position to turbocharge their retirement savings might be a little reticent or hesitant to put money in the stock market right now. What would you say to that?

Benz: I think it really comes down to balance, and I do share that concern. Although I would have said to you even two or three years ago, Susan, that I was feeling a little bit nervous about valuations in the stock market, and yet we’ve seen this upward trend in stocks. 

I think for people who are, say, in their 50s, early 60s, the key is to make sure that you have at least some of that portfolio in safer assets. If, for whatever reason, you are forced to leave work earlier than expected, the last thing you would want to have happen is that you would have to draw upon equity assets while they’re simultaneously in a decline. So, as we age, it does make sense to start building that bulwark of safer assets, holding a little bit of cash, holding some bonds, which, when we examine market performance over a variety of time horizons, we know that those assets tend to hold steady as stocks decline. 

So, don’t go all in on stocks. Make sure that you do have safer assets, but don’t avoid stocks either because you need them for long-term growth, especially given how low yields on the safe stuff are today.

Dziubinski: And then, sort of on the flip side, now is not the time to necessarily swing for the fences if you’re trying to play sort of retirement savings catch-up, right?

Benz: Well, that’s absolutely true. I think that you might have some retirees who say, “Look at how great stocks have performed? Why would I even bother with anything else? And by the way, I’m also going to emphasize those types of stocks that have generated really explosive returns in the hope that they’ll continue to do that.” So, I think that that competing temptation may be there for some people who are looking at retirement and worried that they might fall short. I would really caution against going all-in on stocks at this juncture and specifically going all-in on some of the riskiest parts of the market that have performed well for a long time period. I would be super careful on that front. I do think it comes back to balance. You might use a target-date fund, for example, at that life stage to help approximate what is a sane asset allocation given your proximity to retirement.

Dziubinski: Well, Christine, thank you for your time today. It sounds like when it comes to retirement saving even later in life, better late than never, I guess, right?

Benz: Absolutely. Thanks so much, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.