|Retirement planning: Baby boomers
not catching up
|By Laura Bruce
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
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.
and Roth 401(k)
IRA and Roth IRA
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
"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,"
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.