At a certain age, you are allowed to boost your yearly retirement account contributions. For example, you can direct an extra $1,000 per year into a Roth or traditional IRA starting in the year you turn age 50.1
Your initial reaction may be: “What will an extra $1,000 a year in retirement savings really do for me?” That reaction is understandable, but also consider that starting at age 50 you can contribute an extra $6,000 a year to many workplace retirement plans.
In the event that you have both types of accounts, you have the opportunity to save and invest up to $7,000 a year more toward your retirement savings.1,2
What could regular catch-up contributions from age 50 to 65 potentially do for you? These contributions could result in an extra $1,000 a month in retirement income, according to the calculations of retirement plan provider Fidelity. To be specific, Fidelity says that an employee who contributes $24,000, instead of $18,000, annually to the typical employer-sponsored plan could see this kind of positive impact.2
To put it another way, how would you like an extra $50,000 or $100,000 in retirement savings? Making regular catch-up contributions might help you bolster your retirement funds by that much – or more. Plugging in some numbers provides a useful (albeit hypothetical) illustration.3
If you make $1,000 in additional yearly contributions to a Roth or traditional IRA starting in the year you turn 50, should the IRA yield 4% annually, those accumulated catch-ups will grow and compound to about $22,000 when you are 65. At an 8% annual return, you would be looking at about $30,000 extra for retirement. (Furthermore, a $1,000 catch-up contribution to a traditional IRA can reduce your income tax bill by $1,000 for that year.)3
If you direct $24,000 a year rather than $18,000 a year into one of the common workplace retirement plans starting at age 50, the math works out like this: You end up with about $131,000 in 15 years at a 4% annual return, and $182,000 by age 65 at an 8% annual return.3
If your financial situation allows you to max out catch-up contributions for both types of accounts, the effect may be profound indeed. Fifteen years of regular, maximum catch-up contributions to both an IRA and a workplace retirement plan would generate $153,000 by age 65 at a 4% annual yield, and $212,000 at an 8% annual yield.3
The more you earn, the greater your capacity to “catch up.” Fidelity says its overall catch-up contribution participation rate is 8%. The average account balance of employees 50 and older making catch-ups is $417,000, compared to $157,000 for employees who refrained. Vanguard, another major provider of employer-sponsored retirement plans, finds that 42% of workers 50 and older earning more than $100,000 per year make catch-up contributions to its plans, compared with 16% of workers on the whole within that demographic.2
Even if you are hard-pressed to make or max out the catch-up each year, you may have a spouse who is able to make catch-ups. Perhaps one of you can make a full catch-up contribution when the other cannot, or perhaps you can make partial catch-ups together. In either case, you are still taking advantage of the catch-up rules.
Catch-up contributions should not be dismissed. They can be crucial if you are just starting to save for retirement in middle age or need to rebuild retirement savings at mid-life. Consider making them; they may make a significant difference for your savings effort.
1 – nasdaq.com/article/retirement-savings-basics-sign-up-for-ira-roth-or-401k-cm627195 [11/30/15]
2 – time.com/money/4175048/401k-catch-up-contributions/ [1/11/16]
3 – marketwatch.com/story/you-can-make-a-lot-of-money-with-retirement-account-catch-up-contributions-2016-03-21 [3/21/16]
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