By Dave Reville
When it comes to saving for retirement, too many folks have a lot of catching up to do.
According to most research I’ve seen, nearly half of people over 55 have saved less than $50,000 for retirement. In fact, half of Americans haven’t saved anything at all, according to another survey.
Most people just don’t get serious about saving for retirement until their children have left the nest. Unfortunately, adult children are taking flight later and later these days.
But don’t think because you’re 50 or older it’s too late to start. In fact, one of the benefits of turning 50 is the government makes it easier for you to close the savings gap by allowing you to divert extra money to a retirement account at work, an IRA or both.
This “catch-up contributions” provision applies to employer-sponsored plans, such as 401(k)s, 403(b)s and 457(b)s. If you’ll hit the big 5-0 by the end of the calendar year and you have one of those plans, the tax laws allow you to contribute an extra $5,500 above the normal $17,000 annual limit. That means you can save up to $22,500 in pretax dollars every year between now and the day you retire.
Even without any portion of the catch-up being matched by your employer, the additional contribution translates into an extra $825 to $1,925 in tax savings (depending on your tax bracket). You’ll only pay taxes on the contributions later, when you start taking distributions from the account.
You can also put an extra $1,000 a year into an IRA.
It’s important to note there are minimum and maximum age and income limits that restrict whether and how much you can contribute to all of these plans. Check with the IRS or a tax professional for details.
Of course, all of this is a moot point if you’re not making smart decisions with your investment portfolio before and after you retire. Here are a few investment principles you can apply to your 401(k):
Diversify. Don’t put all of your money into one class of investments. If you spread the money around, when one investment is down, there’s at least a chance another one will be doing well.
Take a little risk. Is all your money in the “safe” option? If the return is less than the inflation rate, you’re losing money.
Consider automatic options. Life-cycle or target-date retirement funds are “set-it-and-forget-it” programs that automatically select a diverse set of investments based on the appropriate level of risk for someone your age. They also automatically rebalance each year to ensure that market gains and losses have not left you with too much exposure to any particular class of investment.
Beware of fees. Management fees are subtracted from your account. Even a one percentage point difference in fees can cost you tens of thousands of dollars over time. Your employer— or the free AARP 401(k) Fee Calculator (registration required)— can tell you how high your funds’ fees are.
Pay attention. Be sure to read your account statements and if you’re concerned that an investment is not doing well, consider making a change. Your 401(k) provider — as well as third parties like Kiplinger’s, Morningstar, Yahoo! Finance and others – should have tools that can help you choose the fund that’s right for you.
Plan for a long life. The Treasury Department has proposed new rules that would make it easier to use a portion of your 401(k) savings to buy annuities, which provide a guaranteed monthly income for life — regardless of what the market does.
If you’re in your 50s and you’re just starting to get serious about saving for retirement, you might feel a bit like Don Quixote reaching for that unreachable star. But by working a little longer, postponing your Social Security claim (thereby supersizing your monthly benefit for the rest of your life) and supplementing Social Security with another stream of guaranteed income (like an annuity), your heart, at least, may lie peaceful and calm.
Dave Reville is the Associate State Director – AARP Vermont.