Why catch up contributions matter
According to a recent GOBankingRates survey, 29% of adults age 55 and up have no retirement savings whatsoever and another 15% have less than $10,000 saved.
However, don’t despair if you feel like you don’t have enough. Catch up contributions can make a real difference.
If you’re behind on your retirement savings, maxing out both your annual contribution and your catch up contribution may be enough to finance a secure and reasonably comfortable retirement.
The potential value of catch up contributions
Let’s say that you have just turned 50 and you have no retirement savings. However, turning 50 is a wake-up call for you, so you decide then and there to max out your retirement contributions to your 401(k) and Roth IRA.
For 2018, you could save a total of $24,000 per year into these two accounts withoutcatch up contributions.
- If you earned an average 7% return per year on that money, you’d end up with$760,000 by age 65.
Now add in catch up contributions, which give you an additional $7,000 per year for a total of $31,000 per year of retirement savings.
- At that rate of savings, you’d have $980,000 by age 65. That means that an extra $7,000 per year that you can save thanks to catch up contributions results in an additional $220,000 in your retirement savings accounts.
How do you find the money to save as catch up contributions
Sure, it is easy to see how beneficial it is to save at least as much as the IRS recommends. However, actually finding the money to save can be the real challenge.
To save more for retirement, you don’t need to find new sources of income, you just have to rethink your existing spending.
Small Ways to Boost Savings: Instead of looking for large chunks of money, think about ways to save that are a whole lot smaller.
Big Ways to Boost Savings: Downsizing and spending less on housing is a really powerful way to save a lot more for retirement.