I'm 52 With $1.4 Million in My 401(k). Would Catch-Up Contributions Be Worth It?

For example, the $7,500 in 401(k) catch-up contributions alone, placed in an S&P 500 index fund at the market’s average annual 11% rate of return, could grow to over $258,000. The full individual contribution in a 401(k) of $31,000, made annually, with 15 years to grow at 11% return could allow you to retire on $1.07 million. That’s even if you had $0 in retirement savings at age 52.

Alternatively, you can use the money for catch-up contributions to accelerate individual plans or alternative savings accounts. For example, you can use this additional money to fund a Roth IRA, building a tax-free portfolio in addition to any other savings you’ve accumulated. Or, you can use this additional income to plan for an early retirement, putting some funds into a portfolio designed to help you retire in your 50s or early 60s.

Use this free tool to match with a fiduciary financial advisor if you’re interested in guidance for your own retirement planning.

Let’s assume you are 52 years old with $1.4 million in your 401(k). For ease of use, we’ll assume one-to-one matching employer contributions. (Employers can sometimes match contributions at different rates.} We’ll also assume you make $100,000 per year. While this is higher than the national median of approximately $75,000 per year, it is a better estimate for someone with fairly significant retirement savings at age 52.

Say you don’t use catch-up contributions. Instead, you continue to make a standard 10% retirement contribution each year. That would come to $10,000, well below the full value you can invest annually in your 401(k). If you hold a mixed-asset portfolio with 8% annual growth, given 15 years of growth left to go before age 67, you might expect to have about $4.71 million in your 401(k) at the time of retirement.

That’s likely more than enough to afford a very comfortable retirement. In fact, even the conservative 4% withdrawal rule could generate a pre-tax retirement income of $188,400 per year.

But here’s the thing: At this point, most of the work in your account is being done by compounding returns. For example, in our estimate above, we didn’t account for your employer’s matching contributions. Let’s update our estimate to assume that you contribute a combined $20,000 ($10,000 from you and $10,000 from your employer) into an account with 8% returns for the next 15 years. By age 67, you might expect to have around $4.98 million in your 401(k).

Even after we doubled your contributions, your final savings only ticked up by 5.5%. (Note: The contribution match level is very generous and not widely used by employers, it is only intended for example’s sake.)

This brings us to your catch-up contributions. Catch-up contributions are a tax benefit that only applies to households already making their maximum retirement fund contributions. Here, that means you must already be contributing the full $23,500 before you can take advantage of the additional tax break for your 401(k). With this level of income, you would already have dedicated almost one-quarter of your pre-tax income to retirement savings. If you push that to $31,000 (the full catch-up contribution for an employer-sponsored account), you’ll be contributing almost a third of your income to your retirement account.

Most households cannot afford that.

If you have the wherewithal, your portfolio would of course grow more quickly with a catch-up contribution. For example, say that you contribute the basic maximum of $23,500 per year. At an 8% rate of return, over the next 15 years, you might expect to retire with about $5.08 million in your 401(k). If you increase that to the catch-up maximum of $31,000, you might expect to retire with about $5.28 million in your retirement account.

Or, say you want to start funding a Roth IRA as a supplemental retirement account. With ordinary contributions, you could fund this portfolio with up to $7,000 per year. After 15 years, at 8% annually, you might have about $190,382 in tax-free savings. With catch-up contributions, you could increase this to $8,000 per year, which might grow to about $217,534 and qualify for tax-free withdrawals.

This brings us back to our central question. Should you take advantage of catch-up contributions? The answer is, it depends. Catch-up contributions are only available to households that have already maximized their retirement contributions. If you currently make the full $23,500 contribution to your 401(k) or $7,000 to a supplemental IRA, and if you can afford to dedicate more capital to a retirement account, then by all means, it might be wise to do so. You’re always better off with more savings.

But here, you probably don’t need it. You already have a generously funded retirement account by ordinary standards. Unless that $188,000 estimate will fall short of your lifestyle needs in retirement, you probably don’t need to significantly boost your savings.

Consider talking through your personal circumstances with a vetted fiduciary financial advisor.

Catch-up contributions can be an excellent way to boost your retirement savings as you head into retirement, or to build up supplemental savings for some extra income. However, if you already have a well-funded retirement account, odds that you probably don’t need to worry too much about this option.

• What if you don’t have a generously funded retirement fund? That’s ok, a lot of people get started saving in their 40s and even their 50s. If you’re only getting started now, here are 5 retirement planning tips for late starters.

• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

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