Preparing for retirement is hard work, and it takes decades of dedicated saving to grow a nest egg worth hundreds of thousands of dollars. But when most people have so many other financial priorities competing for their limited cash, retirement saving often takes a backseat to more immediate needs.
Before you know it, you could be quickly approaching retirement age with little to nothing saved. If that situation sounds familiar, you're not alone. Forty-five percent of baby boomers have nothing saved for retirement, a survey from the Insured Retirement Institute found, and a third of workers have postponed retirement because they lacked enough savings to retire comfortably.
As you get closer to retirement age, it can be more difficult to save a lot of money in a relatively short period of time. Yet few workers are taking advantage of a 401(k) perk that's designed to help older employees supercharge their savings: catch-up contributions.
What are catch-up contributions?
Catch-up contributions allow workers age 50 and over to contribute more each year to their 401(k) or IRA. And although nearly all 401(k) plans offer catch-up contributions, only 15% of workers who are eligible actually take advantage of them, a study from Vanguard discovered.
Most 401(k)s, traditional IRAs, and Roth IRAs offer catch-up contributions, but exactly how much extra you're allowed to contribute depends on what type of account you have. With 401(k) plans, you're allowed to contribute up to $19,000 per year, according to the IRS's 2019 guidelines, but those who are age 50 and over can contribute an additional $6,000 per year. IRAs have contribution limits of just $6,000 per year for 2019, with those age 50 and over eligible to contribute an extra $1,000 per year.
Because 401(k)s have larger contribution limits and allow workers to save more per year than IRAs, maxing out your 401(k) account and taking advantage of catch-up contributions can help you save a significant amount of money in just a few years.
For example, say you're 50 years old with no retirement savings, and you'd like to retire at age 65. If you were to max out your 401(k) -- along with catch-up contributions -- by saving $25,000 per year, you'd have around $628,000 saved in 15 years, assuming you're earning a 7% annual rate of return on your investments.
While that may sound well and good, $25,000 per year is a lot of money, and it boils down to around $2,083 per month. For those who are struggling to save as it is, socking away that kind of money simply isn't feasible. If that's the case, you have options.
What to do if you can't max out your 401(k)
If you don't have an extra $2,000 per month you can put toward your savings to max out your 401(k) and take full advantage of catch-up contributions, there are a couple things you can do: Make some drastic financial changes, or rethink your retirement expectations.
To start saving $2,000 per month, you'll likely need to do more than make simple budget cuts. You may choose to downsize your home, for example, to potentially save hundreds of dollars each month on your housing expenses, as well as pick up a side hustle to bring in some extra income. In addition, you'll probably need to significantly cut some of your other expenses and live as frugally as possible.
If you're not in the position to make those lifestyle changes, your other option is to scale back your retirement expectations so you can live on less. That's not to say you shouldn't save anything before retirement; even saving a little is better than saving nothing. But if you're doing all you can and are still unable to max out your 401(k) and make catch-up contributions, you may not be able to save as much as you'd hoped by retirement age.
In that case, one potential solution is to move somewhere less expensive where your money will go further. You'll still have Social Security benefits as additional income, but considering the average check comes out to just $1,400 per month, that's not much to live on when your personal savings run dry. Housing is one of the biggest expenses you'll face in retirement, so moving to a more affordable city in retirement can help stretch every dollar.
You may also choose to work a few years longer than you'd anticipated if you're short on savings. Postponing retirement by even four or five years can boost your total savings by thousands of dollars, even if you're not maxing out your retirement account. While working longer than you expected may not be the ideal way you'd picture spending your golden years, it will help you live a more comfortable and enjoyable retirement when you do ultimately leave your job.
Maxing out your retirement account and taking advantage of catch-up contributions is a great way to save a lot of money in only a few short years. If you can swing it, you can go from an empty retirement fund to hundreds of thousands of dollars even if you're late to the saving game. That said, even if you can't afford to max out your 401(k), simply saving as much as you can is better than nothing when it comes to planning for a comfortable retirement.