Late Birthday Cards and Catch-Up Contributions

My birthday happens to be this week. There won’t be much celebration, as it’s never been something that I cared to make a big deal about. After your 21st birthday, what does it really matter? I do use the occasion as an excuse to boil lobsters, but that’s more of a New England thing and not so common in Virginia. Maybe I’ll steam up some blue crabs?

One tradition that has survived in my family through the years is that a few relatives send me a birthday card. They have been doing this for decades, and so it has continued this year. Curiously, one of these relatives sends my birthday card express mail nearly every year (including this one). In other words, they are forced to send the card using expedited services, year after year.

Since I am weird, I spent some time pondering this fact over the last couple days. Presumably, this unnamed relative thinks about preparing and sending a card to me every year. Maybe they set a reminder, or just happen to remember when they look at the calendar earlier in the week. They know that they need to place the card in the mail approximately 3 business days prior to my birthday in order for me to receive it on time. Then they forget to mail it, or put it off for some other reason. Now it is 2 days before my birthday, and they must go to the post office (or FedEx) and pay an additional postage fee to ensure that my card arrives on time.

Why does this happen? My birthday happens to be the same day every year, so it hasn’t caught them by surprise. They can easily plan out the deadlines for obtaining, signing, and shipping the card. But, inevitably, this deadline for first-class delivery comes and goes every year, and they are forced to expedite. It cannot be a matter of paying for convenience, since they can place USPS first class mail in their own mailbox and put up the flag. Expedited services require additional time and effort.

The only explanation I can come up with is this: they procrastinate, year after year, because they know that there’s a last-minute alternative. Four or five days prior to my birthday, they have not hit the deadline, so they continue to put it off. But once it is 2 days before the big event, they have to act. And since they know that express shipment is always an option, they default to this process. Year after year.

Catch-Up Contributions

There’s an interesting provision in the United States tax code that allows aging employees to make additional contributions over the standard limit to their retirement plans, which are aptly called “catch-up contributions.” In 2021, you can contribute an additional $6,500 to your 401k (on top of the $19,500 limit) if you are age 50 or older. You can also contribute an extra $1,000 to your IRA.

To be honest, I had not previously given much thought to the catch-up contribution provision. Most people would probably think, “this is a good thing, because it allows people who are closer to retirement to put invest more funds in tax-advantaged investment vehicles, which will help them to reach their retirement goals. This is a win-win situation for all parties involved.”

There are a couple problems here, though.

First off, how many people actually take advantage of catch-up contributions? How many people who didn’t save enough for retirement in their 20’s, 30’s, and 40’s, suddenly decide to divert $26,000 per year to their retirement funds?

According to Vanguard, only 15% of workers took advantage of catch-up contributions. Some percentage don’t need to contribute more in their 50s, but that’s probably a small proportion of the population.

Second, among 50-somethings with no prior predilection for saving and a need to make catch-up contributions, how many actually have an extra $6,500 laying around? The Venn diagram overlap of “never prioritized saving before” and “has $26,000 to invest in a form of delayed gratification” is probably vanishingly slim.

Finally, how much good will additional contributions do for someone so late in their earning/investing life? We in the FIRE community know the tremendous power of compounding returns; the gains over just a few years, or even a decade, will pale in comparison. Better late than never, I suppose, but in many situations this will probably be a case of “too little, too late.”

When thinking about the case of people who utilize catch-up contributions, I initially compared it to expediting shipment of late birthday cards. The employee in question procrastinated when it came to retirement contributions, waited too late to start building his or her nest egg, and now needs to expedite the process.

But then I had another thought: is the express mail option the cause of the problem itself?

A Case of Perverse Incentives

Here’s an interesting fact: I have never received a birthday card from my procrastinating relative that arrived after my birthday. In other words, they were always late to send the card, but never too late to miss the ceremonious event itself. This means that they have always relied on the fact that they could send the card express, whenever necessary. Taking it a step further, I can deduce that, if expedited shipping did not exist, they would place the card in the mail one or two days earlier so that it would arrive on time.

Now let’s consider the catch-up contributor. In one scenario, they delay contributing to their retirement accounts for understandable reasons: paying off student debt, raising a family, paying for kids’ college, etc… But maybe, just maybe, they delayed their 401k contributions because they knew they could make up for it with higher contributions after age 50. Why put that extra cash into my 401k when I could use it to make payments on my new Model 3? I can always start contributing next year!

Is it possible that catch-up contributions disincentivize employees from saving earlier in their careers?

Obviously, this is all hypothetical, and probably doesn’t deserve as much treatment as I gave it. But it’s an interesting thought, that a well-intentioned benefit could be causing the problem that it was designed to solve.

Thanks for sitting in on Thought-Experiment Tuesday. (Shit, I should have published this on Thursday, for the better alliteration.)

What do you think? Are catch-up contributions fomenting bad behaviors in would-be investors? Or am I just thinking too much about this? Does anyone mail you birthday cards? Let me know in the comments.

Photo by Sharon McCutcheon on Unsplash

12 thoughts on “Late Birthday Cards and Catch-Up Contributions”

  1. Fun past as usual! I just turned 50 and have been maxing out my 401k and Roth for all of my 40’s and as much as I could in my 20’s and 30’s. As an architect living in a very HCOL city it’s been a struggle but I always saved as much as I could. I happened to get a large salary increase at 48 and now can easily take advantage of the catch up so it’s really helping me to super charge those accounts. My plan is to FIRE by 53 and not touch the pre tax accounts until 60 so this money will have 7 years to grown which isn’t going to change my life but will add some certainty to my plan so I welcome the catch up concept. I imagine that those that were maxing out in 40s would take advantage of this like I am and those who weren’t wouldn’t be inclined to. Keep up the awesome posts!!!

    • Hey Jacob, thanks for the comment. It sounds like you should be in pretty good shape when you FIRE in a few years. Congrats on maxing out your accounts for over a decade, I’ve never been able to do that! If I’m still working/saving when I hit 50 (I don’t really plan to be), I would certainly consider taking advantage of the catch-up provision. But I wouldn’t be dependent on it, and I would guess you won’t be dependent on it either. Cheers!

  2. Catch up contributions are only 20 years old….. in fact 401k are only a bit over 40 years old. This stuff is very NEW in terms of history.

    MOST people make higher income later in life and thus the catch up is a good way to put more away when your income is higher and you can afford to do so.

    • Hey Tim, agreed that catch-up contributions and 401k’s aren’t very old. In fact, primates dressing up in suits and sitting at desks all day is pretty new, too!

      It makes perfect sense that people will earn more money later in their careers, and thus can take advantage of catch-up contributions to bolster their retirement accounts. I guess my bigger question is, how do we nudge or encourage people to save more when they’re younger? If you put just 5-10% of your salary in a 401k when you’re in your 20s and 30s, you arguably won’t need to make catch-up contributions. Isn’t that the better scenario? Thanks as always for reading and commenting.

  3. i hope you enjoyed the birthday, dude. i really enjoy getting a card or two from friends in family even as i get older. that’s a good analogy you’ve drawn. i can tell you we were thankful for the higher roth limits as we hit the age of 50 and continue to hide money from the future tax man in those every single year. but…we’ve never maxed out a 401k and life and money turned out fine. i have a few friends whom it is probably too late to get started. some find out we could retire any time we like and it baffles them.

    • Hey Freddy, it was definitely a low-key birthday, but that’s how I prefer them. My daughter is pretty psyched that she gets to eat cake for the next few nights. As you could guess, we’re planning to be done with the earning/investing portion of our lives by the time we turn 50. If we’re not, either something went catastrophically wrong, or we decided that we needed $10M to retire. If we still have earned income beyond what’s necessary to live, which is a possibility, I’ll definitely be shoveling it into a Roth IRA (+ catch-up!). It’s always good to shield that cash from future taxes.

  4. Catch up contributions probably won’t help those who never put anything away in their 40s, but they can be helpful for those who couldn’t put anything away in their teens and 20s, and are now trying to catch up to where they should be. Compound interest means they probably won’t totally get there, but it’s a chance to make things better. (Imagine if your relative were in the hospital or away until just 2-3 days before your birthday.)

    • Fair analogy, and I agree. I’m certainly not saying that catch-up contributions are bad, and I’m sure they’re a boon for some people who got a late start. I suppose I am being a bit condescending toward those who didn’t save as much when they were younger. Oh well, maybe I’ll get more clicks and rage-comments if I’m more controversial.

  5. Hope you had a great birthday and boiled lobsters not blue crabs. Some people will always pay and utilize a service, even if they could have paid less by doing something else, just because they’re familiar with the service and most people don’t like to shake things up. It is a funny observation though! With the catch up contributions, I agree with your analysis, why would someone suddenly start saving 26k a year out of the blue? The only answer would be, they’ve been scared straight. They see a dismal future of being old and broke and they suddenly make drastic lifestyle changes. Though these people are rare, like you mention in your vanguard statistic. I worked with a guy who did this, though he had a pension as well but no 401k. He started at 50 and saved up quite fortune in just a few years, the long bull market was perfect timing for him. It’d be nice if congress could pass a tiered 401k max contribution system for people in their 40’s to save a little bit more…maybe an extra 3k a year?

    • Hey Noel, thanks for the commentary. It’s actually heartening to hear of people who suddenly “got it” later in their working lives and saved up a lot of money, it’s just too bad that it probably doesn’t happen very often. I love the idea of a tiered contribution system, I bet we could see something like that in the future. Then again, that just highlights how insanely complex our tax code is, so I can’t feel great about making it even more complicated. Anyway, another problem for another day, right!?

  6. Happy birthday, man! Hope you enjoy/ed crabs or whatever tasty eats of your choice! Interesting analog here about perverse incentives. My opinion is that it likely isn’t a huge reason for people to forestall earlier investing, but I bet it is for a small percentage.

    • Hey Mr. Fate, thanks for the birthday wishes. I’m thinking about picking up something fancy to cook at the market tomorrow, but I’m a little intimidated by the crabs because I have little experience with them. Yeah, I suspect you’re right about people forestalling based on a catch-up contribution. I think the majority of Americans never max out their 401k, so it’s probably not even something they consider in the first place.


If You Read Something, Say Something!

%d bloggers like this: