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Retirement planning: Baby boomers not catching up

If you're age 50 or older, you could boost your retirement savings by contributing more than the standard limit to plans such as 401(k)s and IRAs, but you're probably not. These so-called catch-up contributions can help those nearing retirement to supersize their nest eggs -- morphing them from chicken eggs to ostrich eggs.

For example, the 401(k) contribution limit in 2006, for participants younger than age 50, is $15,000. Participants age 50 or older may contribute an additional $5,000 for a total of $20,000 in 2006.

But research indicates that few people are taking advantage of the opportunity. A study of 2,000 401(k) plans, administered by mutual fund giant Vanguard, shows that only 13 percent of the eligible participants made catch-up contributions in 2004. A study by the Washington, D.C.-based Investment Company Institute, or ICI, focused on IRAs: While about 41 percent of American households own IRAs, just 6 percent made catch-up contributions in tax-year 2004, according to the report.

It's easy to see why a lot of people don't maximize retirement funds: It's hard to come up with the extra cash. Most of the eligible participants are already contributing a portion of their paychecks and trying to set aside another $1,000 or more can stretch a budget too far.

Catch-up provisions:
401(k) and Roth 401(k)
Annual contribution limit for employees under age 50: $15,000
Catch-up for those 50 and older: $5,000
Traditional IRA and Roth IRA
Annual contribution limit for individuals under age 50: $4,000
Catch-up for those 50 and older: $1,000
Annual contribution limit for employees under age 50: $10,000
Catch-up for those 50 and older: $2,500

If you're diligently contributing to a retirement plan, you might not need to concern yourself with making use of the catch-up feature, says Stephen Utkus, one of the authors of the Vanguard study and principal at the Vanguard Center for Retirement Research.

"For some people, it doesn't make any sense to make catch-ups. If a couple has a household income of $60,000, and they're contributing 10 percent to a 401(k), that's $6,000. If they go to 15 percent, that's $9,000, and they're still not even near the limit. If they've been saving throughout their careers, they probably don't need to make the catch-ups. They may decide to make a big effort to jump up to 15 percent, but they don't need to go up to 20 percent."

So, who needs to do catch-ups? Utkus suggests this measurement: If you're 50, with an annual income of $60,000, and your financial assets (not including your residence) equal or are less than your annual income, you're way behind. But if you have three or four times your salary in assets, you should continue saving, but you don't necessarily need to shell out for catch-ups.

"The problem is we hear about the low personal savings rate, and it's the people who save nothing who need to save something. Some people need to get on the stick and save as much as they can," says Utkus.

While the Vanguard study found that household income is a one of the strongest factors determining whether a person makes catch-ups, even the wealthy don't always make the most of financial opportunities.

Next: "I can see catch-ups and Roth IRAs going away."
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