|
 "Right now, I'm just maximizing what goes into the pot," says
Prajudha, 63, who is an accountant for a technology firm in
Sunnyvale, California.
This year, on top of the $18,000 regular limit to a 401(k) plan,
workers 50 and older can add $6,000 per year in catch-up
contributions, which are aimed at helping individuals save enough
for retirement.
Contributions are tax-free, but withdrawals are taxed as income in
retirement.(Individual Retirement Accounts also allow catch-up
contributions, but only at $1,000 per year, on top of the regular
$5,500 limit.)
The additional 401(k) savings could amount to an additional $1,000
per month once a worker enters retirement, according to calculations
done by Fidelity, one of the largest holders of retirement accounts.
"It's a game changer," says Meghan Murphy, director of workplace
thought leadership at Fidelity.
Most employees, however, do not even come close to the regular
limit, let alone put in extra.
According to new data from Fidelity, just 8 percent of its clients
who are 50 and over make use of the catch-up program. Vanguard found
in its last "How America Saves" report that 16 percent contribute.
While those numbers sound really low, Vanguard senior research
analyst Jean Young says there is a rosier picture in certain
demographics. Among those 50+ who make more than $100,000 per year,
the participation rate was 42 percent.
INCOME MATTERS
The key to bigger catch-up contributions: "Give everyone higher
wages," suggests Young.
If you make less than $100,000, maxing out a 401(k) and then adding
catch-up contributions would mean saving more than 20 percent of
earnings. But the national average of people who max out at the
regular limit is just 9 percent, according to Fidelity.
Those easiest to reach may be the 10 percent of workers Fidelity
found who max out the regular contribution but do not do catch-ups
once they hit 50.
Paulus Prajudha got on the catch-up bandwagon after Googling
retirement topics: Every year, he does a search for the maximum
limits and sets his goals accordingly.
Some companies do their own outreach, messaging workers as they
approach 50. You can start your catch-up contributions in the
calendar year you turn 50.
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Jonathan Reitzes, who helps administer his event-staging company's
401(k) plan in Boca Raton, Florida, signed up as soon as he hit 50
last year and has done a good job of bringing along his colleagues.
Out of ten eligible employees, six have already maxed out their
catch-up contributions and two have put in requests to start in
2016. He plans on checking in immediately with the remaining
holdouts.
Reitzes also had a financial planner to nudge him towards making
those contributions, in the way of Adam Vega, a wealth manager at
United Capital in Fort Lauderdale, Florida. Vega uses software to
alert him when clients approach age-based milestones.
While there is a bottom end of the income spectrum who opt for
catch-ups, there really is no top, Vega says.
"Somebody earning $300,000 is still considering a 401(k) strategy,"
Vega says. "It's more about the tax benefit - not that they need to
save more money."
For Timothy Noonan, managing director at Russell Investments in
Seattle, Washington, and author of "Someday Rich," turning 50
coincided with the end of paying college tuition for his two
daughters. Noonan was able to seamlessly fold more money into his
retirement savings without missing it from his daily budget.
He doubts that most people will consider catch-up contributions
because of the issue of delayed gratification. His motivation was
more about facing mortality. After attending several funerals of
friends who died young, he decided that time was more valuable than
money.
"The change after 50 was that I wanted to accelerate the point at
which future employment was voluntary," he says.
For others, a fat bottomline may do it.
Fidelity found that the average 401(k) balance of those doing
catch-ups was $417,000, versus $157,000 for those who did not.
(Editing by Lauren Young and Bernadette Baum)
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