The 50th birthday has a lot of significance. One thing you may not think about when you turn 50 is how it affects your retirement saving. There is, however, an important benefit to turning 50 as it relates to retirement. The government allows a “catch up” contribution to your retirement accounts, which enables you to save more than the stated contribution limits. For IRA and Roth IRA’s, you can add an additional $1000 per year. For corporate retirement plans, you can add an additional $7500 per year.
That sounds great, but will it really make a difference? The short answer is yes, but we’ll give you a longer answer. If you are not using a Roth option, then the increased contributions provide you with a greater tax break each year. That is the difference in the short term. Over the long term, the difference can be meaningful thanks to the power of compounding interest, especially if you have access to a corporate retirement plan with the higher limits.
Let’s look at an example of each. We’ll assume 6% annual returns and a 15-year time period taking you to age 65. It is worth noting that the rate of return is not guaranteed. It can be higher or lower depending on the investments you choose and the market conditions. Based on the assumptions, the extra $1000 per year to an IRA or Roth IRA would equate to an additional $23,000 in retirement assets at age 65. The extra $7500 to a corporate retirement plan under the same assumptions would afford you an additional $174,000 in retirement assets at age 65.
The additional savings are clearly beneficial if your cash flow permits. If it doesn’t, then keep saving as much as you can. Your 50’s are definitely a time to take retirement planning seriously. The “catch up” contribution is a great resource to help you stay on track, get back on track or maybe even get ahead.