Late Start on Retirement Planning? Start Catching Up on 401(k), IRA Contributions

If you got a late start on retirement savings, you’re far from alone in wondering if there’s time to catch up on your 401(k) or Individual Retirement Account (IRA) contributions.

Scrambling to build retirement savings late in the game is hardly the exception. A U.S. Government Accountability Office (GAO) study released in 2017 showed that about half of households age 55 and older have no retirement savings, and that up to two-thirds of workers may not have saved enough to maintain their standard of living in retirement.

Among those with some retirement savings, the median is $104,000 for households age 55 to 64, according to the GAO. A common guideline for retirement is to replace 80% of pre-retirement income, so even with Social Security payments providing some cushion, $104,000 in total savings won’t come even close for the vast majority of people.

One key method people use is “catch-up contributions” to their retirement plans. We’ll get to that in a bit. First, however, it’s important to get a sense of whether you’ll need to take extra measures to help meet your retirement goals.

How Do I Know If I’m Falling Behind?

To determine your retirement needs, it helps to know where you stand. The TD Ameritrade retirement calculator doesn’t just ask investors to input their current savings, income, and expected retirement dates; it also allows investors to consider their future lifestyle and current health to see how those factors might play into retirement planning.

Online retirement calculators can help, but it’s also important to find someone who truly understands your needs, your current situation, and your risk tolerance. “Have conversations with the right people,” said Dara Luber, senior manager, retirement, at TD Ameritrade. “That person-to-person interaction is really important.” 

Now let’s look at some ideas—financial and otherwise—that investors approaching retirement can consider using to accelerate savings.

What Is a 401(k) Catch-Up Contribution?

Because it’s clear that many people get behind on their retirement savings, the U.S. government provides a little wiggle room for those approaching retirement.

Once you reach the age of 50, you can make “catch-up” contributions to IRAs and 401(k) plans. For 2020, the IRA catch-up contribution is an extra $1,000 a year starting at age 50, and the catch-up contribution for a 401(k) is $6,000.

Investors who can make the maximum contribution should start doing so as soon as possible to maximize retirement savings.

More Help from Washington

Starting in 2020, a new law called the Setting Every Community Up for Retirement Enhancement (SECURE) Act took effect, and it offers people more help in saving for their retirement if they got a late start. 

Under the SECURE Act, contributions to IRAs are no longer prohibited after age 70 1/2 for tax year 2020 and beyond. So there will no longer be age restrictions on making IRA contributions. 

In addition, if you turned 70 1/2 on or after January 1, 2020, you can now wait until you turn 72 to take required minimum distributions (RMDs). With age restrictions on IRA contributions removed, it’s possible that you could be taking RMDs at some point and still be able to put money into your traditional IRA. Both these changes allow more time to save. We should note that you still need to have earned income in order to contribute.

Tips to Maximize Savings

If you’re approaching retirement feeling like your wallet’s too thin, consider taking steps in your daily life to address the problem.

Think about your typical “fun purchases,” and then decide on two or three you can live without. “Look at the top 10 things you currently spend on, whether it’s a cup of coffee, a gym club membership, or books, and prioritize,” Luber said. “Find the ones that make you happiest. Give up the ones that don’t, and put the savings away until retirement.”

Investors approaching retirement without enough savings might want to consider finding an income stream to help fill the gap once they leave their jobs. This might mean investing in an annuity or working part-time in retirement. For instance, you could seek to stay on with your company post-retirement as a part-time consultant and a valued source of knowledge.

Working as an independent contractor doesn’t mean forsaking retirement savings. Those who take that path can consider self-employed retirement plans.

Once you’ve identified ways to save or to make more money, it can help to automatically deposit the savings into retirement accounts such as IRAs. Studies show that automatic deposits tend to help investors more successfully build savings.

And remember that your retirement location can have a significant impact on the savings you need. The TD Ameritrade calculator considers variables such as cost of living and taxes for the state you select. “Think about where you might want to retire and see if that’s still manageable given what you’ve saved,” Luber said.