Ask the Money Coach: Are You Ever Too Old to Start a 401(K)?

A reader of AskTheMoneyCoach.com wanted to know whether or not it’s a smart decision for them to launch a 401(k) or 403(b) investment plan later in life. The person asked me simply:

Q: “Should I start a 401(k) or 403(b) investment plan at 63 years of age?”

A: Yes! Actually, I think it can be a good idea to start a 401(k) plan at any point during your working years. You may know that a 401(k) or 403(b) is an employer sponsored retirement savings plan. But you may not know the full range of benefits associated with these plans.

For starters, you get three primary advantages with saving for your Golden Years using a 401(k). The first advantage is that you can set aside retirement funds on a pre‑tax basis; this lowers your annual tax bill. The second benefit is you get the potential for get capital appreciation when you invest your 401(k) funds in investments such as individual stocks or mutual funds. Finally, a third benefit of a 401(k) is that you may receive matching funds from your employer — which helps turbocharge your savings.

A 401(k) also gives you a more disciplined approach to investing for retirement, because you’ll be consistently contributing to your retirement assets — every pay period — regardless of what the market is doing. Such consistency also helps takes emotion out of the investing equation — making you less likely to be driven by fear or greed when the stock market swoons or surges.

Even if you wind up retiring in a few short years—say, at the age of 65 or 70, it’s still worth it for you to put aside more money into that nest egg and help to build your savings cushion.

That way, when you do leave the work place, you are not simply dependent upon your own savings that you might have had, which may be limited. You also won’t be solely dependent upon government funds such as Social Security.

Currently, the average Social Security recipient is only receiving roughly $1,000 per month. That’s not a lot of money to live off of.

If you’re 63, you’re probably at a higher level of earnings power, so you have the option to go ahead and put aside more money.

And here’s a bonus for you: The IRS recently announced that starting in 2012, the maximum amount you can sock away in a 401(k) plan is being raised to $17,000 for those under 50 and to $22,500 for those 50 and older. That’s a $500 increase over 2011 levels. (That $22,500 figure includes the “catch up” contributions that individuals 50 and older are permitted to contribute to a 401(k), as a way to help Americans who may have started saving for retirement later in life).

So let’s assume you did sock away at least $17,000 a year for five years. Well, that’s $85,000. If you saved $22,500 a year for five years, you’d amass $112,500, not assuming any increases (or losses) to your savings.

Hopefully, though, the funds you put aside for your retirement will grow and collect interest. Also, as I mentioned, you may even get some form of an employer match as well. It might not be dollar for dollar, but even if it’s $0.50 cents on the dollar or $0.25 cents for every dollar that you put in, that’s an additional kicker that you can look forward to.

All of this means you have many great reasons, even past age 60, to save in a 401(k) or 403(b) plan—and I would encourage you to do just that.

“Ask The Money Coach” is a syndicated column written by personal finance expert Lynnette Khalfani-Cox, co-founder of the free financial advice blog, AskTheMoneyCoach.com. Follow Lynnette on Twitter at @themoneycoach.