Catch up on retirement

There’s Still Time to Save for Retirement

If you’ve found that your retirement date is approaching and you haven’t saved as much as you’d like, don’t worry: You’re not alone. Getting a late start isn’t the end of the world, and you can build a sizable amount for retirement using a combination of the right account types and catch-up mechanics.

“Plenty of people get a late start to retirement saving,” said Joe Correnti, senior vice president of brokerage product at Scottrade. “The important thing is to get started sooner to give yourself enough time to create and implement a plan that can help you reach financial security.”

The Basics: IRAs and 401(k)s

Let’s start with the basics, and where you might consider putting your retirement savings. Individual IRAs and employer-sponsored retirement plans, like 401(k)s, are popular choices for investors looking to grow their retirement savings because of their convenience and potential tax advantages.

Individuals typically focus on 2 types of IRAs: Traditional and Roth. Traditional IRAs are accounts that allow for tax-deductible contributions that grow tax-deferred. That means you pay taxes when you withdraw the funds, rather than when you invest them. There are no income limits on Traditional IRAs.

In contrast, contributions to Roth IRAs are made with after-tax dollars, and earnings grow tax-free. That means you usually won’t pay taxes on any withdrawals from a Roth IRA, assuming you follow IRS distribution rules.

Scottrade offers both Roth and Traditional IRAs.

Employer 401(k) plans offer tax and other incentives for employees who want to save for retirement. If you choose a traditional 401(k) account, you can contribute pre-tax dollars that grow tax-deferred. With a Roth 401(k) account, you can contribute post-tax money and earnings grow tax-free, if you follow IRS distribution rules. Most employers match a portion of their employees’ contributions.

“Ideally, you would put in at least as much as you need to receive the maximum company match on your 401(k),” Correnti said.

Age Affects Catch-Up Benefits

Now that we’ve outlined account types that can offer tax advantages, let’s look at what this could mean to your investing bottom line. If you’re under age 50, you could be eligible to use both a 401(k) (or similar plan) from your employer and an IRA to contribute more than $20,000 tax-advantaged dollars to your retirement plan. If you’re over 50, then Uncle Sam has another deal for you — a catch-up provision in the form of higher contribution limits. In this case, you could potentially contribute more than $30,000 per year in tax-advantaged accounts.

Regardless of your age, it probably makes sense to contribute enough in your 401(k) account to get the full company match from your employer. That match is free money, and if you’re not taking full advantage of it, you’re leaving money on the table.

Look at the Big Picture

So, yes, you’ve started late. But if you’re 50 years old and save $25,000 per year until you’re 65, that’s $375,000 in contributions alone. Assuming your contribution comes at the end of each year, and you average a total return (principal plus dividends) of 6% on your investments, you’ll have nearly $617,000 after 15 years. (This example does not account for commissions or taxes.)

If you can’t set aside that much, smaller amounts can add up quickly. If you save $10,000 per year over 20 years, that’s $200,000 for retirement, not including investment returns. A 6% return would provide you with nearly $390,000, if you make you contributions at the end of each year.

Of course, you might have more or less aggressive expectations. To help give you context that’s specific to your situation, check out our retirement savings calculator. With the calculator, you can set your interest rate, contribution amount, annual retirement expenses and more. Use this tool to help you understand how much you’ll need for retirement.

Avoid the Wait

It’s true that we recommend not panicking if you’ve delayed your retirement savings, but it’s still important to recognize that time and planning are powerful factors in meeting your retirement savings goals. Check out our investment calculator if you want to graphically see how much you gain in potential retirement funds just by starting earlier. Getting a late start isn’t the end of the world, as long as you start saving sooner rather than later.

Next Step: Check out our Roth vs. Traditional IRA calculator to decide which IRA type best supports your financial goals.

The content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

Scottrade does not provide tax advice and the information contained herein is not meant as a replacement for professional advice. Please consult your tax or legal advisor for questions concerning your personal tax or financial situation. 

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