Standard financial advice when it comes to planning for retirement boils down to "start early, regularly invest in stocks, and let compounding over time work its magic." That works great on paper, but in reality, life gets in the way for most of us.
Far more typical is something along the lines of:
- New hire: pay down school debt, pay all sorts of "life start-up" costs
- Early career: focus on finding a spouse, setting up life together
- Core of your career: kids and the house take priority
And then only later, once your kids are fairly independent, do you feel like you really have enough wherewithal to actually start investing for your own future. Unfortunately, by that point, compounding can't work as hard as it could have if you had started earlier in your career.
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What can you do later in your career?
Fortunately, however, there is a tool that becomes available to you after you've been in the workforce for a while. The tool is called catch-up contributions, and those types of contributions are available for both IRA and 401(k) style qualified retirement accounts.
A catch-up contribution is an additional contribution, above and beyond the standard limits, that people can make to those types of retirement plans beginning in the year they turn 50. For 2024, the catch-up limits are $7,500 for 401(k) type plans and $1,000 for IRAs. Catch-up contributions can even be made even by those who are limited by highly compensated employee rules.
All in, that's $8,500 additional dollars you can contribute each year to your retirement accounts, as long as you remain employed, once you turn 50.
Is that enough?
The table below shows how much those additional contributions can add to your retirement nest egg, depending on how long you continue saving and what rate of return you earn along the way.
|
Years to Go |
10% Annual Returns |
8% Annual Returns |
6% Annual Returns |
4% Annual Returns |
|---|---|---|---|---|
|
20 |
$537,886 |
$417,223 |
$327,279 |
$259,799 |
|
15 |
$293,583 |
$245,110 |
$205,997 |
$174,314 |
|
10 |
$145,099 |
$129,587 |
$116,081 |
$104,302 |
|
5 |
$54,851 |
$52,046 |
$49,420 |
$46,962 |
Calculations by author. Assumes $8,500 per year in contributions, made monthly, earning smooth returns.
Remember that these numbers represent possible outcomes from the catch-up contribution amounts you get to make once you turn 50. Those catch-ups come on top of the ordinary limits available to you. In 2024, the typical limits for are $23,000 for 401(k)s, and for $7,000 for IRAs. Add the catch-ups, and a 50-year-old may be able to contribute as much as $30,500 to a 401(k) and $8,000 to an IRA for the year.
In total, if you're 50 or up, you have as much as $38,500 in contribution limits available to you inside your qualified retirement accounts in 2024. If that's still not enough to enable you to reach your goals, you can save an unlimited amount in a standard brokerage account.
Get started now
Of course, as that table suggests, if you're eligible to make catch-up contributions, time is rapidly running out for you to be able to build a decent nest egg by the time you retire. You will never again have more time before you retire than you do right now. So make today the day you take advantage of whatever your contribution limits are and start focusing on building your own retirement nest egg.
