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Over 50 and Behind the Curve for Retirement? It's Catch-Up Time!

Maxing out qualified retirement accounts can allow you to bolster your nest egg for the future.

Chart from author's calculations. Credit: Daily Finance
Chart from author's calculations. Credit: Daily Finance
Written by Chuck Saletta, Daily Finance

If you're at least 50 years old and you're feeling behind on your retirement planning, you have an awesome opportunity to catch up. Uncle Sam gives working folks 50 and older the chance to contribute a little bit extra to qualified retirement accounts like 401(k)s, 403(b)s, and IRAs.

In 2013, the catch-up contribution is $5,500 for employer-sponsored plans like 401(k)s and 403(b)s and $1,000 for Individual Retirement Accounts (IRAs). That's $6,500 in extra money you can sock away tax deferred—or potentially even tax- free—every year from now until you retire, on top of the ordinary contributions allowed for your younger coworkers.

How Much Can You Sock Away?

In a typical 401(k) or similar plan, most employees can save up to $17,500 this year. Add in the catch-up contribution, and that figure jumps to $23,000. Younger people with earned income can save $5,500 in their IRAs, but those eligible to make the catch-up contribution can sock away a total of $6,500. Add the two together, and the total is a hefty $29,500. If you're married to someone who is also 50 or older and working, those numbers can potentially double to a maximum of $59,000 for your household this year.

That's some serious cash, but if you're behind on your overall retirement planning, you may need to save every bit of it and more in order to give your nest egg a chance to last as long as you do. The advantage you have is that, in your 50s, you're likely near your peak earnings years. The disadvantage? You've got that much less time for your money to compound than your younger coworkers.

What's It Worth to You?

The time between ages 50 and 70 is really something of a "golden window" for retirement savings. In that period, you're eligible to make catch-up contributions on top of your regular contributions, but you don't yet have to worry about required minimum distributions. Once you pass age 70½, those required minimum distributions typically start to kick in, and you can no longer contribute to a Traditional IRA, even if you're still working.

So if you've hit 50 and are behind the curve on your retirement saving, the clock is ticking. To maximize your nest egg from here on out, the amount you can sock away matters at least as much, if not more, than the rate of return you get.

The chart above shows the amount you can potentially end up with after five and 10 years of maxing out both your 401(k) and IRA — with and without the catch-up contributions. As you can see, that extra boost from the catch-up contributions helps a lot. Indeed, an investor earning 5 percent and contributing the extra catch-up amount winds up ahead of an investor earning 10 percent and just maxing out the base amount.

Of course, there are no guarantees in the market. Still, the reality is that when the alternative is spending the money and winding up with no nest egg, even lousy investing beats not investing at all.

Get Started Now
Even if you're behind in your retirement planning, an additional nest egg somewhere in the neighborhood of $350,000 to $450,000 can potentially be yours. To get it, though, you'll need to max out your retirement contributions, and earn an annualized return in the 5 percent to 10 percent range for 10 years. That's around the historic range of long-run returns from the market, which isn't a guarantee, of course, but means it's certainly within the realm of reasonable possibility.

It may seem like a reach, but as you do things like pay off your mortgage, finish paying for college tuition, and transition your kids to being independent adults, you may find yourself with additional disposable income. The key is to keep your other costs down, sock away every penny you can spare, and take advantage of the tax benefits while you still can.

In a decade or so, when you're in much better financial shape for retirement, you'll be incredibly glad you did.

Chuck Saletta is a Motley Fool contributing writer.

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