Chapter 20. What If You Get A Late Start Investing?

THERE ARE MANY reasons so many people in the older age bracket have a lack of savings and investments. Some people simply don’t make enough money to set aside enough for their later years. Others have bad luck in their career, horrible financial role models, poor personal finance habits or a lack of knowledge when it comes to money management. Both Ben and Robin have children and they can understand why many parents would put their children first when it comes to their spending priorities.

Whatever the reason, there are a number of people who wish they had started saving when they were younger but didn’t. Beginning the process of saving and investing in your 40s or 50s isn’t ideal but it’s not a lost cause either. If you made a late start there are still steps you can take to build up your investments. You just have to make some potentially uncomfortable moves and stop wasting time. The best time to start saving was ten years ago, but the second best time is today. Don’t be discouraged if you’re in this place. Many people in this same situation give up, saying it’s too late, but that’s not the case.

Older savers may have some potential advantages. You should be in your peak earnings years. Hopefully the kids are out of the house and off your payroll. Empty-nesters could use the money they were using to fund their children’s university or other costs and funnel them into savings. The same is true if you get to the point where you pay off your mortgage. If you’ve already been making those debt repayments for many years, you can immediately shift those payments to your savings.

You might be tempted to shoot for the moon and take on tons of risk with your investments to play catch-up, but saving money is still far more important than how you invest when we’re talking a period of maybe 10–20 years to build up your investment balance before retiring.

Let’s assume Carl and Carla Carlson are both 50 years old with little in the way of investments and savings. The kids are now out of the house so they can supercharge their savings to make up for lost ground. Carl wants to take more risk to make up for their shortfall while Carla would rather increase their savings rate to make up for lost ground.

The Carlsons currently have a household income of £100,000 that will grow at a 2% cost of living adjustment each year. Carla expects their investments to compound at 6% annually and would like to save 20% of their income, while Carl thinks he can do much better than that by trading stocks and saving a little less. Carla thinks Carl is too overconfident in his stock-picking abilities and would rather save more money than take on a riskier investment strategy.

The couple wants to retire by age 65 or 70 but are unsure how far their savings can get them in such a short amount of time. Let’s look at an example which shows their current plan, one with a higher savings rate and one where Carl’s stock picks knock it out of the park:

Assumes £100k income growing at 2% per year.

Even if Carl did come up trumps with his trading account and doubled up Carla’s 6% return target, a higher savings rate would have still led to better results. A doubling of the Carlsons’ savings rate from 10% to 20% led to a better outcome than a doubling of their investment returns from 6% to 12%, even over a two-decade period. And chances are Carl is not the next Warren Buffett, so increasing their savings rate is far easier than increasing their investment returns.

Taking more risk in your portfolio doesn’t guarantee you anything in the markets. The market won’t give you good returns just because you need them. Your savings rate is something you control while no one controls the returns thrown off by the financial markets. A more likely scenario is by taking more risk Carl would actually harm the performance of their savings because the track record of professional, let alone amateur, stock-pickers is so poor.

Saving at an early age is important because it helps you build solid financial habits and allows compound interest to snowball your money over time. But saving is probably even more important for those who are behind on their retirement savings because you don’t have as long to allow compounding to do its thing.

Now this doesn’t mean your time horizon as an investor is done right when you retire. According to the Office for National Statistics, a couple retiring today have more than a 50% chance that at least one of them will live into their 90s. You could still have two to three decades to manage your money during your post-work years. It’s just that your time as an earner and saver may have a shelf life if you don’t work during retirement.

There are other ways for Carl and Carla to extend the life of their portfolio. A simple solution is to delay their retirement. Investment expert Charles Ellis found that delaying your retirement from age 62 to age 70 could reduce your required savings rate by more than 50%. If you don’t like the idea of working full-time when you’re 70, part-time employment is a possible compromise.

Most people would prefer not to work beyond their mid-60s, but for those who are willing and able it can drastically increase your odds of success in retirement. It not only means you can save more money but also allows your money to compound for longer.

Working for longer has other benefits too. A US study published in 2020 found that people who work beyond the age of retirement were “healthier, less isolated, and happier” than those who don’t. The researchers also pointed out that “work provides opportunities for learning, reasoning, and social engagement, all of which help stave off the adverse effects ageing can have on the brain.” They cited a long-term study into the memory function of more than 3,000 British civil servants over a 30-year period, covering the final part of their careers, as well as the early years of their retirement. The study showed that verbal memory, which declines naturally with age, deteriorated 38% faster after retirement.

In summary, having to play catch-up to fund life after work is an unenviable position to be in. But if that’s where you are, don’t despair. You do still have options. Just stop making excuses and get your act together. Running out of money in your later years is no fun for anyone.

Up next – financial advice. Can you manage without an adviser? Or do the benefits outweigh the cost of paying for one?