Playing Retirement Savings Catch-up at Age 50

According to a December study from Transamerica, the total household retirement savings of American workers age 50 and older is a median $135,000.

Consider that if you were to use the sustainable withdrawal rate most experts agree on, the 4% rule, this would only generate an annual income of $5,400!

However, that median only tells part of the story. The study also found that there's a wide gap between the amount of money saved by unmarried and married Americans. Specifically, unmarried Americans over age 50 have only saved a median $48,000 in retirement savings, while their married counterparts have saved a median $177,000 (using the 4% rule, annual income of $1,920 and $7,080 respectively).

Perhaps you were thinking that Social Security can make up the difference for you. Then also consider this: according to the Social Security Administration, the average retired American couples gets $2,212 per month, or roughly $26,500 per year, in Social Security income. That's not a lot of money when you consider that the average American household earned $53,657 in 2014 and the average annual expenses for an American retired couple over age 65 were $41,403 in 2013.

Any way you calculate it, even with Social Security median retirement savings of the 50 and older crowd is still falling short.

Ramp up your savings
Most Americans get their biggest paychecks in the decade before retiring, and that means that if your retirement savings plan has fallen behind, there's still time to catch up. Moreover the IRS is willing to help those 50 and over by raising their contribution limits to retirement accounts.

First, take a hard look at your spending and consider what percentage of your income you’re saving in retirement accounts. Can you shift some of your discretionary spending every month to your retirement savings?

In 2016, everyone can contribute up to $18,000 to a workplace retirement plan, such as a 401(k) plan, and if you're over 50, the IRS lets you put an additional $6,000 in as a catch-up contribution. The IRS also allows catch-up contributions for both traditional IRAs and Roth IRAs. In 2016, the normal contribution limit to an IRA is $5,500, but people over 50 can contribute an additional $1,000. 

Those catch-up contributions can really add up. For example, let's assume Jim is 50, has already saved $100,000 and currently contributes the $18,000 maximum to his 401(k) plan. If Jim earns a 6% hypothetical return over the next 15 years, he could retire at age 65 with a $658,623.28 nest egg. Pretty good, right? Now, let's assume Jim contributes the $6,000 catch-up contribution every year, too. If he does, then his nest egg would balloon by nearly $140,000 to $798,279.10. That may not be enough extra money to retire to the island of your dreams, but it could be enough to ensure a financially secure retirement.