Across My Desk: Playing Retirement Catch-Up

Many of us haven't saved enough for retirement and while the thought of playing catch-up is often daunting, there are things you can do.

Below are bits and pieces from an ariticle written by Glen Curtis last month at Investopedia.com. It's titled Playing Retirement Catch-Up:

"People in their 40s and 50s who have little or no savings have their work cut out for them if they want to have any hope of retiring at age 65. That said, there are certain things that these folks can do to build their nest eggs as rapidly as possible and to ensure that they will have at least some money to support them in retirement.

Fund Your 401(k) to the Hilt

An employee in this age category who is offered a 401(k) at work should consider funding it to the maximum amount. In 2008, individuals are permitted to sock away up to $15,500 annually on a pretax and/or post-tax basis. And for individuals who reach age 50 by the end of the year, there is a "catch-up" provision, which allows contributions of another $5,000.

To provide you with a flavor for how powerful maxing out a 401(k) can be, consider the following:

An individual who is 40 years old and who contributes $15,500 annually to a 401(k) could accumulate more than $1.2 million in savings by age 65. This assumes an 8% return and no employer contributions (see Figure 1). That's a powerful savings tool, and it's evidence that workers nearing retirement should seriously consider funding their 401(k) as soon and as much as possible. If this individual increases savings by the catch-up amount of $5,000, at age 50, this would lead to an additional $147,000 in savings.

Roth IRA Contributions

Roth IRAs offer investors a great way to save and grow money on a tax-deferred basis. In 2008, investors are permitted to put away up to $5,000 in after-tax money that will grow tax-deferred, and will be tax free if the distribution is qualified. Folks over 50 are permitted to put away an extra $1,000. The good news is that investors are permitted to fund both a 401(k) and a Roth IRA at the same time.

Is there a catch?

There are some income limitations. For example, if you are single and your modified adjusted gross income (MAGI) is above $101,000 a year, your contribution limit is reduced; if you are single and your MAGI tops $116,000 your contribution limit is nil. For married folks filing jointly there are contribution limitations for those with MAGI above $159,000. And above $169,000 the contribution limit is nil.

How much can one potentially sock away with a Roth? Consider the following example:

A 40-year-old that invests $5,000 each year and obtains an annual rate of return of 9% has the potential to accumulate more than $461,000 by age 65. Even a person that waits until age 50 and starts saving $6,000 per year (using the same return assumptions) can save as much as $192,000 by age 65.

A fully funded Roth IRA and 401(k) can help to rapidly build retirement assets.......

Take Full Advantage of Allowable Deductions

As per the Internal Revenue Service, for tax year 2008, the new standard deduction is $10,900 for married couples filing a joint return, reflecting an increase of $200; $5,450 for singles and married individuals filing separately, an increase of $100 and $8,000 for heads of household, which increased by $150 from the 2007 amounts.

However, it's important to note that standard deductions aren't for everyone. In fact, if you have a large amount of mortgage interest, deductible taxes, business-related expenses that weren't reimbursed by your company, and/or charitable donations, it probably makes sense to itemize your deductions.

Sit down with a CPA and go over your personal situation to determine whether it makes sense to itemize. Then get in the habit of saving receipts and keeping good records. Remember, in the end it's not always what you make, but what you save that counts - particularly as you get closer to retirement.....

Disability Coverage

Don't forget to either obtain disability coverage or make certain that your job offers some sort of group disability benefit. The idea behind obtaining such coverage is simple: to protect yourself and at least a portion of your income and nest egg just in case the worst should happen.

Your chances of becoming disabled depend on your career and your lifestyle, but according to a 2006 press release from the U.S. Census Bureau, more than 50 million Americans report some level of disability. Given that the U.S. population is right around 300 million, that's a substantial number. And it means that in order to protect your income and improve the chances that you will retire with some form of nest egg, it makes sense to at least consider some form of disability coverage.

Bottom Line

Individuals in their 40s and 50s who have done little or no retirement planning are certainly at a bit of a disadvantage. However, with the proper planning and a willingness to save and invest, the odds are not insurmountable."