Every year, Vanguard publishes its report on retirement savings and trends. Regarding retirement “catch-up,” Vanguard reports that very few Americans utilize the over 50 catch-up contributions the Internal Revenue Service (IRS) offers. The percentage of eligible participants using this benefit is 16%, and for those making less than $100,000, the rate drops to less than 7%. Why is this?
What is the catch-up contribution?
The IRS has established limits for the amount of money you can save in a defined contribution plan (401k, 403b, and 457b). For example, participants of the 401k can save $22,500 (2023) annually. The “catch-up” contribution allows a participant over 50 to save above this limit by $7,500. For individual retirement accounts, a similar allowance is made up to $1,000 above the IRS limit of $6,500 (2023) per year. However, for most people, the savings required to utilize this benefit would represent a significant percentage of their gross income – over 20%. It's certainly not surprising most people cannot afford to take advantage of this catch-up benefit.
The Bible is clear that saving little by little every year is wise. Proverbs 13:11 says, “Dishonest money dwindles away, but whoever gathers little by little makes it grow.” But what if you are behind gathering for retirement, or you fear you haven’t gathered enough? It’s never too late to start investing and saving for your retirement goals. Consider these six best practices to catch up on your retirement savings:
1. Start with a firm foundation.
Before focusing on retirement goals and investing, it is wise to establish your financial foundation. The 8 Money Milestones are a great way to assess your financial health and determine what steps you need to take before saving for retirement. This means establishing a pattern of giving, getting out of debt, and having a fully funded emergency fund of 3-6 months. Once you’ve worked through the first five milestones, you will be in a great place to begin playing catch-up with your retirement savings.
2. Know how much is enough.
As you consider your retirement years, understand how much money you need. Our goal as Christians is not to gather as much as possible but to gather what we need so that, ultimately, our financial resources can be used to further God’s Kingdom. Luke 12:15 says, “Take care, and be on your guard against all covetousness, for one’s life does not consist in the abundance of his possessions.” While saving is wise, you should know what you need to steward God’s resources well. If you’re unsure how to calculate what you need, seek the help of a professional who can walk you through scenarios and help you plan.
3. Start saving.
The best retirement saving advice is to start. If you’ve put off saving or fallen behind in your retirement, it’s never too late to create goals. Get started by funding your employer-sponsored retirement account up to your match (Milestone #3). Once you’ve reached your company match, save money into your Roth IRA up to the contribution limit. Once you’ve fully funded the Roth IRA, including all catch-up contributions offered to individuals over the age of 50, then come back to your employer-sponsored plan and save the rest. Overall, you should target at least 15% of your income (Milestone #6) and more if you need to catch up to your goals. By saving into pre-tax and post-tax accounts, you can help lower your effective tax bracket in retirement.
4. Cap your expenses.
As you get closer to retirement, your expenses will differ from when you were younger. The expenses of a young couple with three toddlers running loose in the house will undoubtedly differ from those in their 50s or 60s preparing to retire. While you might be tempted to replace those expenses with new hobbies and toys (boats, RVs, etc.), capping your expenses is a great way to save your income and take advantage of those catch-up contributions offered by the IRS.
5. Downsize before retirement.
One area of your life that can significantly impact making life more straightforward and less expensive is downsizing before retirement. Certainly, this process can take different forms depending on your situation but consider a housing scenario with lower utility bills and potentially no mortgage. Not only would you be able to save more for retirement, but this could enable much more extraordinary generosity at the same time.
6. Increase your income.
The other side of the margin equation is your income. Several ways to increase your income include working extra hours, taking a new role within your company, or even delaying your planned retirement for a few years. Each action would allow you to save more into retirement and catch up on those lost years. Even more exciting, you could consider an encore career where you do something you genuinely love well into the years you had planned for retirement – it may not even feel like work!
To leverage the IRS catch-up provisions and save for retirement, you must create margin in your lifestyle spending. This means reducing your expenses, and increasing your income as you approach your retirement years. To do this, create a solid financial foundation that eliminates debt and establishes a good cash cushion to handle unexpected emergencies. While you may be behind in retirement savings, it is never too late to start investing for your future. Most importantly, these actions will enable more extraordinary generosity before and during retirement.