How to win at playing retirement catch-up

Retirement account still in the dumps? Jump on special rules that let boomers save more.

EMAIL  |   PRINT  |   SHARE  |   RSS
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all RSS FEEDS (close)
By Dan Kadlec, Money Magazine contributing writer


(Money Magazine) -- Consider this, if you have doubts about any lingering damage to your retirement savings from the financial crisis: Although stocks are up more than 60% since March, the 401(k) of a typical boomer at the same company for at least 10 years is still worth less than it was two years ago -- even with additional contributions over that period and employer matches. No surprise, then, that a recent AARP study found that 42% of boomers are now worried that they won't have enough money to retire comfortably.

The only way to ensure that your nest egg will be big enough is to ramp up your savings in a major way -- you can't count on continuing 60%-plus gains in stocks to bail you out.

Enter Uncle Sam with a big helping hand: giving anyone 50 and older the chance to make catch-up contributions to retirement accounts, above the limits for younger savers. Though the rules have been in place since 2002, only 13% of people who are eligible take advantage of them, according to the Vanguard Center for Retirement Research. Aim to become part of that elite group.

Know your limits

The catch-up provisions allow investors 50 and older to kick in an extra $5,500 this year to a 401(k), 403(b), or government 457 plan, above the current $16,500 maximum for younger employees. You can also contribute $1,000 above the current $5,000 limit to a Roth or traditional IRA, and $2,500 more to a Simple IRA. That can really add up quickly.

Find the money

Of course, it's tough to come up with an extra $5,500 if you're already contributing $16,500 to a 401(k). There's only so much gas in the ole engine, right? Wrong. Your budget is loaded with variable expenses; if you think creatively, you can come up with the $300 or so a month you'll need, after accounting for the tax break, to fund the catch-up benefit.

Start by cutting off your adult kids: Nine in 10 parents admit to helping their adult offspring financially, and nearly a third of them concede the aid is setting back their own retirement plans, the financial firm Ameriprise reports. "The kids of boomers have been riding the parent gravy train way too long," says Evelyn Zohlen, a financial planner in Huntington Beach, Calif.

Other ideas that can easily save several hundred dollars a month: Downsize your car, travel, and cable and cell service. Skip two or three meals out each month. Refinance the mortgage before rates go up. Get a higher-deductible homeowners policy. Jog or ride a bike, and let the health-club membership lapse.

Invest with caution

Direct your extra contributions to investments that will correct imbalances in your portfolio. For instance, if you were smart or lucky enough to pile into stocks when values were way down, put most of your catch-up money into fixed-income investments. This is no time to try to make back your losses with high-risk investments. With just 10 to 15 years to retirement, you need to avoid another big hit.

A prudent mix for fiftysomethings: around 55% stocks, 45% bonds and cash. "It's no longer about shooting for maximum gain," says Clifford Michaels, a financial planner in New York City. "It's about matching your investments to your time frame."

Contributing columnist Dan Kadlec is co-author of "With Purpose: Going From Success to Significance in Work and Life" and "The Power Years," a guide for baby boomers.  To top of page

Send feedback to Money Magazine
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
Tools to make your money grow You've started saving and built a financial base. Time for a few new strategies and tools to get your money to grow even more. From real estate to IRAs, here are some tips. More
Ready to start saving? Here's how to do it right When you are just starting out or finally starting to get serious about saving, the basics will get you far. Here are more than a dozen tips that will help you lay the base for building your net worth. More
Meet four kings of Alibaba's online retail empire Alibaba's shopping sites account for 80% of online retail in China. Meet four successful merchants. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.