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07/06/06 - Baby Boomers Are Failing To Catch Up

By: Investor Solutions, Inc.

Are you a baby boomer that has failed to catch-up?

A major provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 is the 50+ catch-up provision. The catch-up contribution provision provides that, effective for plan years starting on or after January 1, 2002, certain retirement plans such as 401(k) plans and IRAs may permit participants age 50 and over to make additional "catch-up" contributions. Since 2002, catch-up contribution amounts have been rising steadily. Most plans reached the full increase in 2006. For 2007 and thereafter, the catch-up amount will be indexed for inflation.

Table 1-Retirement Plan Contribution Limits for 2006

The problem is that most people are not taking advantage of this opportunity when they should. A recent study by the Vanguard Group showed that out of 2,000 401(k) plans, only 13% of the eligible participants made catch-up contributions. The numbers are even lower for IRA, just 6% made catch-up contributions according the Investment Company Institute.

It's no wonder that the average 401(k) account balance of a 60 year old employee with a 30-year earning period is just $180,000 (from a 2004 study by EBRI).For retirees counting mainly on their 401(k) assets to get them through retirement, that could spell trouble. $180,000 is just not enough. If you want your asset to survive through retirement, an account that size can only generate an annual income of $9,000. Unless your retirement plans consist of living under a bridge and eating SPAM all day, I suggest you start fuelling your retirement dreams and take advantage of the catch-up provisions.

Joe and Jim

Let's look at an example. Joe and Jim have both saved a little more than the average: at 50, their retirement accounts are each valued at $180,000. We are also assuming also that Congress votes in favor of extending the Act and the catch-ups do not expire in 2010. Joe is 50 this year, but ignores the catch-ups and simply contributes $15,000 to his 401(k) each year until retirement. Jim, also 50, cut costs and manages to contribute $20,000 to his 401(k) until retirement. At 65, both Joe and Jim retire. Joe's account is worth approximately $1,200,000 (assuming an annual return of 10%) while Jim's is worth around $ 1,350,000(assuming the same rate of return). That's a whopping $150,000 difference!

Most will say that it's hard enough to make maximum contribution each year. Coming up with the extra $1,000 or more in cash to make the catch up is like squeezing blood from a stone. However difficult it is, get creative and start cutting costs. Making the additional contributions can mean a safer retirement. Don't pass up the opportunity and start catching-up.

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