Catching Up on Retirement Contributions

Are you over 50 and underfunded for retirement? There’s still time with these tips

2/11/2015 8:40:08 AM
Retirement is looming, but your accounts are anything but booming. Despair not — even if you’re late in the game, there are some strategies that can help you pull off a retirement win. Taking care of debt, aggressive saving and making IRS-sanctioned catch-up contributions can give you a decent nest egg in just a decade.
First things first: if you have high-interest non-deductible debt (think credit cards), it’s time to get that paid off pronto. Every dollar you spend on paying down interest-carrying debt saves you money down the line, and if you can eliminate monthly debt payments before you retire, you can significantly increase your budget during your retirement.
“If the interest rate is over 7%, you’re likely to save more in interest by paying down the debt than you would earn by investing the money,” says attorney and financial planner Erik Carter. “If the interest rate is 5-7%, you can go either way depending on how comfortable you are with debt and how aggressive an investor you are. If the rate is below 5%, you’re probably better off investing any extra savings.”
Most credit cards, even for consumers with excellent credit, have interest rates above the seven percent threshold, so start putting as much as you can toward eliminating this debt. Start with the highest-interest debt first (while still making minimum payments everywhere else) to maximize the savings of making yourself debt-free. Then you can focus on the real business of retirement.
The goal of every retirement plan, at every age and income level, is setting aside some savings. You need to find room in your current budget for money you can squirrel away until later. And when later is sooner than you’re prepared for, the size of your monthly savings needs to grow accordingly.
“We’re not talking about the kind of piddling savings that comes from giving up your twice-a-week Starbucks Venti Latte,” says finance and retirement expert William P. Barrett. “Instead, you need to start saving a good 10% of gross income or even more. This may require substantial changes in [your] lifestyle now, but they’re almost certain to be less painful than what might be required in 10 or 20 years if you don’t start now.”
Remember, even if such a high rate of savings puts the squeeze on your current lifestyle, it’s well-worth knowing you’ll be supported in your post-work years. And to sweeten the deal, the IRS allows people over 50 to make catch-up contributions to many retirement accounts.
For 2014, elective deferrals (that is, income you choose to divert into a retirement account) are capped at $17,500 for most individuals. For people age 50 and over, however, the IRS allows an additional annual contribution of up to $5,500. The amount of standard and catch-up contributions increases incrementally as the years go on, so make sure to keep tracking the numbers and put everything you’re able and allowed to aside for retirement.
Even with a late start, compound interest is your friend. By getting rid of high interest debt and maxing out your catch-up contributions, the money you put aside for retirement over the next decade or two can easily grow to an adequate amount to allow for a relaxed retirement. Tighten that budgetary belt now, and you don’t have to worry about losing the shirt off your back later.

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