Many people neglect their retirement savings during their 20s, 30s, and even 40s. In your 20s, you may be focused on things like paying off educational debt and the credit card balances you racked up during college, all while trying to build some near-term savings. In your 30s, your priority might be to buy a home. And in your 40s, you may be fixated on socking money away to help pay for college so your children don't wind up with the same debt burden you did.
As such, many people reach their 50s without a lot of money socked away in a retirement savings plan. That's the bad news. The good news is that both IRAs and 401(k)s allow savers to make catch-up contributions starting at the age of 50.
If you have an IRA, your catch-up is worth $1,000. With a 401(k), it's even more substantial -- $6,500.
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But according to recent data from Vanguard, only 16% of savers aged 50 and over made catch-up contributions in their 401(k)s last year. So if you're behind on savings, that's an opportunity you don't want to pass up.
The importance of making up for lost time
Once you retire, you may be limited to just a couple of income sources -- your savings, plus the benefits you receive from Social Security. You can expect the latter to replace about 40% of your preretirement income, assuming you earn an average wage. But most seniors need about twice that income to enjoy life, so the rest may need to come from your savings. And if you're behind in that regard, it's important to catch up.
Now you might think that making catch-up contributions in your retirement plan won't make a big difference. But if you have a 401(k), it will. (To be clear, it will also make a difference with an IRA, but to a lesser degree, due to IRA catch-up amounts being lower.)
Say you're 50 years old and want to retire in 17 years. If you save an extra $6,500 a year in your 401(k) during that time and your investments generate a somewhat conservative 6% average annual return, you'll be left with an additional $183,000 in retirement funds. That's not a small sum of money. (For context, the 6% in this example is well below the stock market's average, but the logic is that the typical saver might shift heavily toward more conservative investments once their 60s begin.)
Make sure you're on track for a secure retirement
As a general rule, it's a good idea to retire with 10 to 12 times your ending salary on hand in savings. If you're nowhere close but are eligible for catch-up contributions, it pays to cut back on expenses or boost your income with a side job to truly max out your IRA or 401(k). Making that effort during your 50s and beyond could spell the difference between having to really track every dollar in retirement versus having a lot more financial freedom.
