Catch Up Contributions for Retirement Plans
Have you fallen behind on your retirement savings?
That's an unfortunate reality for too many Americans. A survey by the Employee Benefit Research Institute (EBRI) found that a third of American workers are not confident that they will be financially secure throughout retirement.
If you share this concern, you need to do more than just worry about the problem.
9 Ways to Catch Up on Retirement Savings
Whether you are in the early stages of your career or nearing retirement, there are steps you can take to improve your retirement security. Here are nine strategies that can help you get back on track with your retirement contributions:
1. Update your retirement-calculator assumptions
Your first step is to get an accurate read on the situation using a retirement calculator.
Even if you have previously used a retirement calculator to figure out your savings targets, it is wise to periodically re-run those calculations to see how time, investment returns and other factors are affecting them.
Six variables generally go into these calculations:
- An investment-return assumption
- An inflation-rate assumption
- An annual retirement-savings goal
- Your projected years till retirement
- The number of years you expect to live off retirement savings
- An annual retirement-spending allowance
Resist the temptation to make the numbers work simply by boosting your return assumption or reducing the inflation assumption. That's just wishful thinking. (Simply changing the numbers in the calculator won't affect what you actually experience.)
However, the third, fourth and fifth variables are all things you can influence by changing your plans. The strategies that follow are ways you can have an impact on those variables to catch up on your retirement savings.
2. Maximize your 401(k) matching contributions
Does your employer offer matching contributions on your 401(k) plan?
If so, the employer match is generally based on how much you contribute. If that is the case with your plan, then you should make sure you are contributing at least enough to get the maximum matching contribution available from your plan.
Money for retirement contributions may be hard to come by; but with that being the case, you should not pass up the opportunity to get extra money from your employer. Maximizing your 401(k) matching contributions is a way to make each hard-earned dollar that you put into the plan worth more.
That employer match is something you can add to your annual retirement-savings goal when performing your retirement calculations.
3. Take advantage of 401(k) catch-up contributions
IRS regulations limit the amount most people are allowed to put into their 401(k) plans to $19,500 per year (for the 2020 tax year). However, people aged 50 or over can contribute an additional $6,500.
The purpose of these additional contributions for older workers is precisely what this article is about: to help people catch up on their retirement savings.
The total of the ordinary contribution limit plus the catch-up contribution limit allows people aged 50 or over to contribute up to $26,000 to a 401(k) plan in 2020. It may not be easy to come up with that much money to contribute, but at least older workers have a higher legal ceiling to work with when figuring out how much they can contribute.
That higher ceiling increases the amount by which you can raise your annual retirement-savings goal in your retirement calculations.
4. Make catch-up IRA contributions
An IRA can be an excellent supplement for a workplace retirement plan, or a substitute for a workplace plan if your employer doesn't have one.
Similar to 401(k) plans, traditional and Roth IRAs allow older workers to contribute an extra amount annually.
The regular limit for IRA contributions is $6,000 for 2020. The additional catch-up contribution people aged 50 or older can make is $1,000.
If you have fallen behind in your retirement savings, using catch-up IRA contributions is a positive step you can take to increase your annual retirement-savings goal.
5. Use a Health Savings Account (HSA) to supplement retirement savings
If you belong to a high-deductible health plan (HDHP), you are eligible to contribute money to an HSA to fund medical expenses.
While people generally start out using an HSA to fund immediate expenses like healthcare premiums and deductibles, they may discover in time that HSAs can also be a valuable retirement-savings vehicle.
There is no deadline for using the money you put into an HSA, so what you don't use from year to year can accumulate over time. Like contributions to a 401(k), contributions to an HSA are tax-exempt, as are any investment earnings on that money.
The added advantage of an HSA is that money in them is not even taxed when it is withdrawn, as long as it is used for qualifying medical expenses. Given that healthcare is a major portion of retirement expenses, this can make an HSA a very valuable supplement to your retirement savings.
For 2020, you can deduct up to $3,550 in contributions to an HSA if you are covered by an individual HDHP and up to $7,100 if you are covered by a family HDHP. If you are bumping up against the contribution limits for traditional retirement plans, use these HSA contribution amounts to build long-term savings for future medical expenses.
6. Do a career assessment
While knowing the IRS limits for various retirement savings options is helpful in some situations, often the problem is not the legal limit but simply being able to afford to save more for retirement.
If that is the case, take stock to see if there are ways you could improve your earning power:
- Are there opportunities for promotion that would earn you more?
- Could changing jobs result in higher pay?
- Are there skills you could acquire to increase your marketability?
- Is there a side gig you could take on part time to augment your current wages?
Looking at how to get more out of your career may not only enable you to contribute more to retirement savings now, but could also increase the long-term viability of your career.
7. Push back your retirement date
If contributing more to retirement savings annually is not an option, then you might consider working a few years longer.
Pushing back your retirement date has two positive impacts on your retirement assumptions. It gives you more years to build up retirement savings and, by effectively shortening your retirement, it means you won't have to live off those savings for as many years.
However, before you assume that simply working longer is the answer to catching up on retirement savings, think through how realistic it is.
Consider your health and the physical demands of your job. Also think about how up to date your job skills are and how much demand there is for your occupation. Not everyone who intends to work longer is actually able to do it when the time comes.
8. Reconsider your social security strategy
To some extent, the longer you wait to start collecting Social Security, the higher your annual benefits could be.
This means that delaying starting to collect social security can pay off in the long run, especially as a companion strategy to working longer. If this approach allows you to delay when you start collecting social security, then the higher benefits you ultimately receive can help your retirement nest egg go farther.
9. Create a debt-elimination plan
While working on building retirement savings, you should also be paying attention to eliminating debt.
If you retire with debt, the repayments and interest expense you face will eat into whatever retirement nest egg you've been able to build up.
Addressing debt is an important part of preparing for retirement because the EBRI survey found that most American workers have an issue with debt to at least some degree. Not surprisingly, that survey also found that confidence in retirement security is much greater among workers who don't have a debt problem.
So, if you want to catch up on retirement savings, eliminating debt is an important, and fundamental, step. Otherwise, the more debt you have, the more savings you will ultimately need to repay it.
As these strategies show, just because you have fallen behind on retirement savings doesn't mean you should just give up. There are several steps you can take to catch up; and the sooner you start, the better.