401k Catch-up
Not Exactly a Do-Over, But Definitely a Catch-up
If you and your company jumped on the 401k bandwagon when the plans first were introduced in the 1980’s, and if you have made close to the maximum contributions every year, enjoying the benefits of substantial employer matches, by now your retirement should look pretty safe and secure. Even with your 401k’s loss of value during the stock market meltdown, the combination of Social Security and your independent retirement savings should provide reasonably well for you. If you have managed the rest of your finances as well as you have managed your 401k, then you have every reason to feel confident that you will get by no matter what happens in the economy and financial markets.
Most people do not manage their finances so skillfully. Most people never have learned to manage money for the long haul, and most feel so pressed by their immediate obligations that retirement comes in at the very bottom of their financial priorities. If you closely resemble Larry Lunchbox, the “average” American, you have a 401k which, for the most part, you neglect, just letting it roll and the payroll deductions take care of themselves. You feel grateful for the tax advantages when you count them every April 14th, and you let it go at that.
As you pass that age-50 milestone, however, “the future” seems shorter than the past, and retirement looms larger than before. If you are like most Americans, at age 50 you begin seriously considering—maybe fantasizing about, and maybe even seriously planning for—retirement. You naturally begin to wonder whether or not you have invested enough in your 401k. And, if you discover you have not put-in all you could, you begin wondering whether or not you can catch-up?
What must you do, and how can you do it?
As soon as you reach 50, start using your 401k Catch-Up privileges. In 2008, you may add $5000 above the regular limit on contributions. Therefore, you can invest $15, 500 of your regular earnings before you hit the ceiling; and using your 401k Catch-Up, you can enhance the account with another $5000, for a total of $20,500. Even with a wobbly investment plan, the regular contribution and the extra 401k Catch-Up will increase by at least 50% by the time you reach retirement age.
But the benefits don’t stop there. In the last three years before you reach “regular retirement age”—in other words, 65—you may ignore the regular 401k Catch-Up Ceiling and add up to $31,000 to your account in 2008.
All of these numbers will be indexed for inflation every year, but they always will increase at least $500 per year, so that you can continue using your 401k Catch-Up privileges to add extra security for those well-deserved retirement years when you get to resume the radical youth you abandoned sometime in the early seventies.