50 or Older? How to Catch Up on Your Savings

The belief that turning 50 means starting to slow down is likely a young person's perspective. Those who have reached the "big five-oh" know better. Retirement is approaching, and there's still a lot of life to live. That's why it's crucial to ensure you have the funds to support the life you've planned.

Thankfully, the federal government acknowledges that individuals nearing retirement may need to accelerate their savings. The tax code offers "catch-up" contributions, allowing people aged 50 and older to increase their tax-advantaged contributions to IRAs, 401(k)s, and HSAs (starting at age 55).

Utilizing catch-up contributions can significantly enhance your retirement savings. For instance, if you turn 50 this year and contribute an extra $1,000 to your IRA at the start of each year for the next 20 years, earning an average return of 7% annually, you could have nearly $44,000 more in your account than someone who didn't make catch-up contributions. The impact is even greater for a 401(k) or similar plan, where the catch-up contribution limit is higher.

Ready to boost your retirement savings? Here's are some ways to help:

Is your retirement savings on track?

Assessing your retirement savings progress is crucial to ensure that you will have enough funds to cover essential expenses during your retirement years. The first step in this process is to carefully evaluate how much you have saved so far and how your savings rate compares to what you will need in the future.

No matter what stage of life you are in, there are simple steps you can take to improve your retirement readiness. To save more money, you can put more into your retirement accounts like a 401(k) or IRA. You can also consider diversifying your investments to potentially increase your returns and reduce risk.

It is important to regularly review and adjust your retirement savings plan as needed. This could mean reviewing your money goals, adjusting your investment plan, or talking to a financial advisor. By taking proactive steps to assess and improve your retirement savings progress, you can better prepare for a financially secure future.

Take Advantage of Catch-Up Contributions.

When you turn 50, you can make extra contributions to your retirement accounts to save more on taxes.

You can contribute an additional $1,000 per year to either a traditional or Roth IRA. This means that in 2024, your total contribution limit will be $8,000.

For those in a 401(k), Roth 401(k), 403(b), or similar workplace retirement plan, the catch-up contribution is even more substantial: up to $7,500 annually. This means you can contribute up to $30,500 in 2024.

The SECURE 2.0 Act of 2022 has introduced new rules for high earners: Starting in 2026, individuals earning more than $145,000 in the prior year must make all catch-up contributions to a Roth account using after-tax dollars. Those earning $145,000 or less, adjusted for inflation, will be exempt from this Roth requirement.

Harness the Power of Tax Advantaged Accounts

Use accounts that offer tax advantages for long-term investments and tax-efficient planning. This is important even if you already have enough saved for retirement. These accounts can help you maximize your savings and minimize your tax burden.

Contributing to traditional IRAs or 401(k)s can reduce your taxable income. However, you will be required to pay taxes when you withdraw the funds. These accounts also benefit from tax-deferred compounding.

Roth IRAs require you to pay taxes initially. However, you can withdraw money without taxes after reaching age 59½, as long as you meet specific criteria. This offers the potential for tax-free compounding.

Tip: Compare traditional and Roth IRAs to determine which option best suits your needs.

If your employer offers a high-deductible health plan with a Health Savings Account, consider enrolling in both. This can help you save money on medical expenses. The HSA allows you to contribute pre-tax funds to pay for qualified medical expenses.

Be sure to understand the benefits and limitations of both the HDHP and HSA before making a decision.

If you have an HSA, try paying for medical expenses out of pocket so you can keep your HSA contributions invested. This plan helps your HSA money grow without taxes and can be used for medical costs, even in retirement. If you don't pay yourself back for medical costs this year, save your receipts. You can still get reimbursed for those expenses later on, as long as you have an HSA.

Invest for the future

It's important to regularly put money into retirement accounts with tax benefits. How you invest that money is also very important. Consider investing a portion of your savings in a diversified mix of US and international stocks and stock mutual funds, as historically, stocks have outperformed bonds and cash over the long term.

As you approach retirement, it may be wise to gradually reduce your allocation to stocks. If you receive company stock as part of your pay, make sure to include it in your investment strategy. Be cautious of the dangers of having a large portion of your investments in one stock.

Regardless of your retirement timeline, aim to build a portfolio that includes a variety of investments. This approach can provide growth opportunities and help outpace inflation, while also offering some risk-reducing diversification.

Remember, stocks are more volatile than bonds or cash, so you need to be comfortable with the associated risks. Ensure that your investment mix aligns with your time horizon, risk tolerance, and financial situation. You should always consult your financial advisor.

Goal: Enjoy Retirement

When planning for retirement, using tax-advantaged savings accounts and catch-up provisions can improve your financial situation. This will enable you to enjoy the retirement lifestyle you've envisioned.

Sources:
https://www.fidelity.com/viewpoints/retirement/catch-up-contributions

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

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These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.