If Paulus Prajudha ever stops working, he will be exceedingly happy about the decision he made in his early 50s to supersize his retirement account with catch-up contributions.
“Right now, I’m just maximizing what goes into the pot,” says Prajudha, 63, who is an accountant for a technology firm in Sunnyvale, California.
This year, on top of the $18,000 regular limit to a 401(k) plan, workers 50 and older can add $6,000 per year in catch-up contributions, which are aimed at helping individuals save enough for retirement.
Contributions are tax-free, but withdrawals are taxed as income in retirement.(Individual Retirement Accounts also allow catch-up contributions, but only at $1,000 per year, on top of the regular $5,500 limit.)
The additional 401(k) savings could amount to an additional $1,000 per month once a worker enters retirement, according to calculations done by Fidelity, one of the largest holders of retirement accounts.
“It’s a game changer,” says Meghan Murphy, director of workplace thought leadership at Fidelity.
Most employees, however, do not even come close to the regular limit, let alone put in extra.
According to new data from Fidelity, just 8% of its clients who are 50 and over make use of the catch-up program. Vanguard found in its last “How America Saves” report that 16% contribute.
While those numbers sound really low, Vanguard senior research analyst Jean Young says there is a rosier picture in certain demographics. Among those 50+ who make more than $100,000 per year, the participation rate was 42%.
The key to bigger catch-up contributions: “Give everyone higher wages,” suggests Young.
If you make less than $100,000, maxing out a 401(k) and then adding catch-up contributions would mean saving more than 20% of earnings. But the national average of people who max out at the regular limit is just 9%, according to Fidelity.
Those easiest to reach may be the 10% of workers Fidelity found who max out the regular contribution but do not do catch-ups once they hit 50.
Paulus Prajudha got on the catch-up bandwagon after Googling retirement topics: Every year, he does a search for the maximum limits and sets his goals accordingly.
Some companies do their own outreach, messaging workers as they approach 50. You can start your catch-up contributions in the calendar year you turn 50.
Jonathan Reitzes, who helps administer his event-staging company’s 401(k) plan in Boca Raton, Florida, signed up as soon as he hit 50 last year and has done a good job of bringing along his colleagues. Out of ten eligible employees, six have already maxed out their catch-up contributions and two have put in requests to start in 2016. He plans on checking in immediately with the remaining holdouts.
Reitzes also had a financial planner to nudge him towards making those contributions, in the way of Adam Vega, a wealth manager at United Capital in Fort Lauderdale, Florida. Vega uses software to alert him when clients approach age-based milestones.
While there is a bottom end of the income spectrum who opt for catch-ups, there really is no top, Vega says.
“Somebody earning $300,000 is still considering a 401(k) strategy,” Vega says. “It’s more about the tax benefit – not that they need to save more money.”
For Timothy Noonan, managing director at Russell Investments in Seattle, Washington, and author of “Someday Rich,” turning 50 coincided with the end of paying college tuition for his two daughters. Noonan was able to seamlessly fold more money into his retirement savings without missing it from his daily budget.
He doubts that most people will consider catch-up contributions because of the issue of delayed gratification. His motivation was more about facing mortality. After attending several funerals of friends who died young, he decided that time was more valuable than money.
“The change after 50 was that I wanted to accelerate the point at which future employment was voluntary,” he says.
For others, a fat bottomline may do it.
Fidelity found that the average 401(k) balance of those doing catch-ups was $417,000, versus $157,000 for those who did not.