Is it Too Late to Save for Retirement?

One of the most regrettable feelings is that of missed opportunity. Fresh out of college and just weeks into my first job in Dallas, I missed the last bus heading back to my Irving apartment. It was 10:15 pm on a weeknight and I was in a lifeless metropolitan downtown area with no easy way to travel the 16 miles to my bed. This was almost two decades before Uber, I wasn’t one of the 4% of Americans with a cell phone, and there were no cabs frequenting this area. I know the feeling of missing a window of opportunity. It was not a pleasant feeling. I have certainly heard worse stories of missing out on an opportunity, including a story a friend shared with me.

Decades ago, my friend’s father was working at a construction site when – to hear him tell the story – a funny little man who was short in stature went from person to person at the site. When the man came around to my friend’s father, what he heard was a sales pitch. “Invest in my company. This is the chance of a lifetime to get in on the ground floor.” The workers scoffed at the man whose distinctive voice and persistent sales pitch stuck in their heads as they went back to their construction work in Plano, Texas. Within a few years that scoffing turned to regret for those who remembered the man and his offer. All of the workers had decline the offer to buy stock in a local company owned by the man who talked to them. Had they taken the man up on his offer, their $16 shares would have been worth ten times that within days. The man was H Ross Perot and the company was Electronic Data Systems. That was just the beginning for Perot who amassed a net worth of $4.1 billion before his death in 2019.

Opportunity missed.

Does Late Mean Too Late?

When it comes to regrets, we have all had a few. On the financial front, that regret might be an investment opportunity missed like my friend’s father, or it might be procrastinating on making moves you know you need to make. If you look up and find yourself a decade or two or three into your working life, yet your retirement savings are not keeping pace with where you imagine they should be, is it too late to save for a good retirement?

Turning to an old adage for the answer, the best time to plant a tree was twenty year ago. The next best time is now.

No, it is not too late.

Breaking Down Retirement

It can be dangerous and misleading to answer a vague question with a very specific answer, so let’s take a minute to break down what it means to retire. While the Social Security Administration publishes a number they call “full retirement age,” don’t confuse a federal government benefit program with a mandate on when you should retire. There are gainfully employed workers in their 80’s who work for the sense of connectedness and purpose it gives them, and there are FIRE (Financial Independence, Retire Early) movement devotees who jump out of the work force as quickly as possible, sometimes in their 30’s. Retirement is really less about an age and more about developing the means of financial support for the rest of your life, and for some people, working is still part of the retirement equation.

So retirement can be about hitting a number, but that number is more a dollar amount, not an age. With lifestyles that range from frugal penny-pinching to extravagant spending, the dollar amount you need is determined by the amount you expect to spend. When facing strong emotions like regret, facts are your friends, so rather than go with an answer of “it depends,” let’s work through an example to see if someone can start later in life and still have a comfortable retirement. Let’s…

Retirement Example

45 year old couple, no retirement savings

For our retirement example, let’s look at a hypothetical couple approaching age 45 with no retirement savings. They got busy, life happened, kids entered the picture, and when they woke up one day their 45-year old selves were staring at them in the mirror wondering if they could ever afford to retire.

Our couple will be making $100K per year. Just for reference, in Texas the average household income was $106,819 in 2024 and median income for 45-65 year old householders was $91,649, so let’s pick a number between those two figures as a fair example (and to make calculations easy).

I won’t discuss how to save or where to invest here, that will be in another article, but today we will focus on determining if this couple can ever stop working. There are two important parameters that we need on our model, so let’s look at each one briefly. Market return is key and I’ll use 10% annual total return in the example. We can argue about that number – many financial experts use 8% because it is a more conservative number, it doesn’t include dividend reinvestment, and frankly makes it easier for them to have your portfolio outperform after they take a cut – but the S&P 500 has averaged about 12% annually in total returns in the past 100 years. I was skeptical of that number, so I downloaded the data and did my own math to confirm it. Here is the public data I used, but I’ll go conservative and use a 10% annual return. We could get sophisticated with randomizing the annual returns, but let’s keep it simple to see if it is mathematically possible for this couple to be okay in retirement, or if they should panic and eat daily bologna sandwiches to have any hope of retiring.

Our fictional couple knows they have ground to make up, so they are going to commit to investing 15% of their income into retirement. That is $15K per year. “Commit” is an important word here. They need to be diligent about changing their behavior so they can have a decent retirement. A continued failure to save and invest will be a problem.

If we time travel twenty years into the future, the couple is now 67 years old, and they are ready to take a step back from their 9-to-5 jobs. Will they be able to make that move financially?

US Retirement Norms

Before we get to our oh so exciting conclusion and see if our couple will sink or swim, it is important to look at retirement in proper context. Life in retirement is different, and if you don’t adjust your lens to acknowledge those differences, your picture may not be in proper focus. In the US, retirement spending is typically 20-40% lower than spending during working years with the average hovering around 22%. This Fidelity article talks about reasons for that spending decrease.

There is conventional wisdom floating around that you should withdraw 4% of your retirement nest egg each year, so let’s use that number. I don’t subscribe to a set percentage for reasons you’ll see later, but this is a model so let’s run with that fairly common 4% withdrawal advice.

Retirement spending is not flat. It often follows what the financial community calls the “retirement spending smile.” Think of a smile – kind of a U-shape with a peak on the left and right and a valley in the middle. The retirement spending smile indicates that there is often higher spending in the beginning – think “Woo hoo! We are retired and can go travel now!” – and in the end – think declining health and more medical bills. The valley in between is a time that reflects natural aging when you might not be up for all of the travel or fun pricey hobbies of early retirement so you drop those expenses, but you are still in good health and haven’t seen the medical bills piles up yet. That is a real phenomenon, but for simplicity, we’re going to use a model with expenses that rise by inflation each year. That is more aggressive spending than reality and will let our fictional 45-year old couple have some additional peace of mind knowing that modelling higher spending gives them some spending cushion.

The Eye Opening Results

Back to our 45-year old couple nervously awaiting the results of the model. Here are the specific parameters I used in the model:

• Annual Income: $100,000 + 2% annual salary increases
• Annual Retirement Investment: 15% of annual income
• Annual Investment gains: 10%
• Retirement age: 67 (full retirement age for those born in 1960 or later)
• Annual Retirement Withdrawals: 4%
• Monthly Social Security Benefit at age 67: $2,870*

*Social Security benefits will vary based on income over a person’s career. For this example, I assumed an average salary of $70K and a peak of $140K and only have one person claiming Social Security. This keeps the example very conservative as husband and wife might both be eligible to claim Social Security increasing the monthly benefit.

Drum roll, please. By saving 15% of income from age 45 – 67, our late-starting couple will be able to sock away $432,674 of their hard earned money. Add to that the glorious power of compounding gains and average stock market returns and they will step into retirement having a nest egg of $1,521,589. Even with a late start, they were able to build a significant nest egg to allow for retirement with a comfortable lifestyle. To be clear this is their retirement investment portfolio, not their net worth. They may also have a house, cars, property, etc. on top of this money.

With $1.5M in investments, what will their spending look like? Our couple retires at the end of the year then they turn 67 withdrawing 4% per year giving them $66,949 to spend in their first year of retirement. Add to that Social Security of $2,870 per month and you have $101,390 for the year. They retired with income of just under $155,000 per year, but that included investing $23,190. When you back out money they used for investing and factor in the typical drop in spending of 22%, they need $102,498 to maintain their current lifestyle. That first year will be slightly tight by the pure numbers, but it will also be their lowest income of retirement. They would likely have at least a little in savings to cover that mathematical shortfall. The reality is that behavior changes with circumstances, so if they felt they were coming up $1,100 short, it would not be difficult to eat out on few occasions or drop a subscription or two to make the numbers align. They could also withdraw slightly more than 4%. This is one of the reasons I don’t subscribe to a strict 4% withdrawal approach. You should use your ability to adjust what you withdraw based on what life throws at you. You must also fully acknowledge that there are tradeoffs, and you can’t overdraw every year without consequences. In the case of our example couple, adjusting the budget down slightly or taking an extra $1,100 to cover the year are both valid options.

The Storybook Ending

In the years that follow, our couple ignores the retirement smile spending and increases their spending each year. By age 70 their investments generate $184,000 annually and they continuing to withdraw 4% of their balance which gives them $115,449 to spend that year. Their spending amount is growing 6-7% each year which will easily outpace inflation’s average of 3.2% since 1913. Their investments are growing even faster than their spending, so things are looking rosy.

A thinking couple might then use that growing investment money to increase their lifestyle, give generously, relocate, travel, or do numerous other things. They have gone from being “just fine” to having some really fun options. However, our model does not adjust with thought or reason on the fly to the math, so staying on the same 4% withdrawal plan means they would be withdrawing almost $500K – yes, half a million dollars! – by age 89.

Despite not starting to save and invest for retirement until age 45, these folks will be just fine. Statistically they will live until about age 89. At that age they their investments will return a cool $1.12 million in growth that year and they will leave the earth with $11.89 million in their investment portfolio. That doesn’t include a house or any other assets. I think we can agree that they have done well by all but the most opulent standard.

The Moral of the Math

I’ll put on my Obvious Man cape and say math shows that getting a late start on your retirement investing doesn’t have to sink your retirement plan. Following a disciplined approach of regularly investing 15% of your income can still put you in an enviable position at retirement.

You might be tempted to conclude that it is okay to wait to save for retirement. If you have not been intentional about saving and investing, there is hope, but don’t make things harder on yourself by intentionally failing to act. Building your saving and investing muscle early removes a lot of the stress of planning for retirement and will make your plan more capable of handling unexpected events. Consistently investing 15% from age 22 until 67 will have you on a great path to retire, even at a lower income level than our model. Intentionally delaying saving and investing, being inconsistent with setting money aside, or not saving enough opens you up for problems in the long run.

For those wondering how I got back to my apartment, I walked the length of downtown Dallas from my firm’s fancy office building on the east side to the Greyhound bus station in the West End. I had some change – yes, I needed a quarter for the pay phone – and I called the one phone number I knew in Dallas. And by Dallas, I mean Garland, which is a good half-hour drive from where I was calling. My college roommate was just walking in the door and agreed to come pick me up and drive me to Irving, which is a solid 20 minutes in the opposite direction of his home. He was probably in the car for an hour and a half to make the whole loop to get me to my apartment. Shout out to John Billimek for the ride.