Help Make Your Retirement Easy
People who are closely reaching their 50’s feel burdened knowing that they need to save up for their retirement, but not knowing how. Eventually they give up, after trying so many things that ended up by not working. Recent federal legislation encourages the 50-and-better set to catch up by expanding their retirement contribution limits.
But in spite of the obvious advantages of maximizing contributions, only about one in seven Americans over the age 50 with the opportunity to make a catch-up contribution were acctually able to do so in 2005, according to the Vanguard Center for Retirement Research.
Yet catch-up contributions to tax-deferred retirement savings, supplemented by some practical lifestyle adjustments, still give the 50-plus crowd a good chance to set aside enough to rest easy and live comfortably in retirement. “I have clients in their 70s and 80s who were dead broke at 50,” says Jan Dahlin Geiger, a Certified Financial Planner in Atlanta, “but who got in gear and became millionaires. So it is possible.”
Those who are still relying on Social Security checks should stop now. Jack N. Rosenberg a CPA partner at Koch Reiss & Co. stated that “Social Security really cannot cover the cost of living,” he says. “It’s important to have some realistic form of retirement planning in place. Many of the boomers will not be able to afford the lifestyles they’re living today on earnings from their savings. But even if you are over 50, there’s still a window period to start socking away dollars.”
Yet, how much is enough for people? Some financial pundits say the magic number is a cool $1 million, minimum. If you’re 50 and don’t have anything saved, “those numbers can get kind of scary,” says Barbara O’Neill, a specialist in financial resource management at Rutgers University who wrote the National Endowment for Financial Education’s “Late Savers Guidebook.”
“Flip that around and say that anything is better than doing nothing,” she says. “Employers are cutting back big time on employee benefits, so people are really going to be on their own. There are 76 million baby boomers, and the government can’t afford us all. If you want a decent lifestyle, you need to create it.”
For late savers, ensuring financial independence is easier than it used to be, due to recent revisions in pension law that allow for older Americans to amass retirement savings more quickly than their younger co-workers. Legislation first enacted in 2001 and made permanent in the Pension Protection Act of 2006 allows workers over 50 to increase contributions to IRAs and tax-deferred retirement plans.
These include 401(k) plans for the private sector, 403(b) plans for employees of schools, colleges and nonprofits, and Section 457 deferred compensation plans for state and local government workers.
Here are some of the more important maximum contributions you can make:
IRAs (Roth or traditional)
2007
$4,000 — all workers
$5,000 — workers age 50 or older
2008
$5,000 — all workers
$6,000 — workers age 50 or older
After 2008
Maximum IRA contributions are inflation-adjusted in $500 increments
401(k)s (Roth or traditional)
2007
$15,500 — all workers
$20,500 — workers age 50 or older
After 2007 maximum employer plan contributions are inflation-adjusted in $500 increments. Maxing out these catch-up contributions can make a huge difference in the amount you end up with at retirement. For example, Mary has saved $25,000 toward retirement. At 50 she continues to save $6,000 a year in a 401(k) plan earning 8 percent a year on average until she retires at 65. The total amount saved would be almost $245,000, says Diana Plucienkowski, executive vice president and Certified Financial Planner at Meg Green & Associates, a Miami-based financial planning firm.
But if instead Mary takes full advantage of allowable catch-up contributions between 50 and 65, her savings would jump to $635,922. Making the maximum contributions to a Roth IRA at the same time would boost that figure to nearly $800,000. Of course, contributing $25,000-plus a year is not going to be a piece of cake and may put a crimp in Mary’s current lifestyle.