Because Social Security alone won't cover the bills in retirement, it's on us, as individuals, to save independently. And if you have access to a 401(k), you're in luck in this regard. That's because 401(k) plans come with much higher annual contribution limits than IRAs. For the current year, you can sock away up to $18,500 annually if you're under 50. Workers 50 and over, however, have an even more prime opportunity to save. That's because they're granted a $6,000 catch-up that raises their total annual 401(k) contribution limit to $24,500.
Clearly, it pays to capitalize on that catch-up, whether you're behind on savings or simply want to boost your nest egg for the future. But most older workers chose not to go that route last year. In fact, only 14% of 401(k) participants aged 50 and over took advantage of catch-up contributions in 2017, according to data from Vanguard. And that means they missed a key opportunity to build more wealth.
If you're 50 or older, you'd be wise to max out your 401(k) between now and retirement. And if you make smart choices, you'll be able to do just that.
Your 401(k): It pays to max out
The benefits of maxing out a 401(k) are twofold. Not only will you have a chance to grow more wealth for retirement, but you'll get a more sizable tax break up front, assuming you fund a traditional plan and not a Roth 401(k).
Imagine you're 50 years old and want to retire at 67. If you max out your 401(k) over the next 17 years, including making catch-up contributions, you'll add $755,000 to your nest egg, assuming your investments are able to generate an average annual 7% return during that time. Not only that, but you'll exempt $24,500 of your income from taxes at present. This means that if your effective tax rate is 30%, you'll save $7,350 in taxes off the bat.
Of course, making those catch-up contributions and maxing out your 401(k) is easier said than done, but if you're willing to make a few sacrifices, you might eke out that $6,000 a year after all. One strategy to employ is reviewing your budget and finding ways to cut corners. Freeing up an extra $500 per month to save could boil down to giving up restaurant meals, canceling a gym membership, and unloading a second household vehicle. Play around with your various spending categories and see which ones allow for the most savings with the least impact on your quality of life.
Another option you might consider is getting a side hustle. Of the 44 million Americans who currently work one, 25% bring home over $500 a month as a result. Furthermore, workers aged 53 to 62 are more likely than their younger counterparts to earn an extra $1,000 or more per month from a side hustle, so if you're willing to put in the effort, you can make enough cash to max out your 401(k) without having to cut too many (or even any) expenses.
Finally, be sure to send any raises or bonuses you get in the coming years directly into your 401(k). Since it's money you're not used to getting, you shouldn't miss it when it lands in your retirement plan instead of your bank account.
Not all older workers have access to a 401(k), so if you're lucky enough to work for a company that sponsors one, you have a real opportunity to set yourself up for a nice retirement. If you haven't been taking advantage of catch-up contributions thus far, make this the year you finally do, and continue doing so until your career comes to a close. You'll be thankful for it later on.