How to grow your retirement savings faster
Turning 50 is a big milestone in your life. And the government is giving you the best birthday present you could get—a special opportunity to get closer to a more secure financial future.
Starting at age 50, you’re allowed to make catch-up contributions to your 401(k) plan. So if you’re concerned that you might not have enough money to last through your retirement years, here’s your chance to grow your retirement savings more quickly.
Anyone 50 and older may contribute an additional $5,500 a year to their 401(k), as long as the employer doesn’t have contribution limits. (The vast majority of employers don’t.) Otherwise, you can open an IRA and contribute up to $6,500 a year. These amounts apply to 2014 and are indexed for inflation.
If your mortgage is paid off and your kids are out of college, and you have the money to save, take advantage of this law.
Catching up will add up
Making these catch-up contributions to your 401(k) or an IRA can really help grow your retirement savings. Here are two examples:
- Saving an additional $5,500 (the maximum annual catch-up contribution amount allowed under the current law) each year between 2014 and 2021 will add up to $58,000 in 2021, assuming a 7 percent rate of return.
- If you’re now 50 and expect to retire at 65, putting aside an extra $5,500 each year will add up to $143,000 at the begining of 2029, assuming a 7 percent rate of return.
In addition, by making catch-up contributions, you can save money on taxes now, because 401(k) contributions are made with pre-tax dollars that reduce your taxable income, and depending on your income, your traditional IRA contributions may be deductible.
Now, you have two reasons to celebrate your 50th birthday. Although your birthday lasts only one day, catch-up contributions could help your money last a lifetime.