Catch-up contributions: Will they help older workers bridge the retirement gap?
The average American begins saving for retirement at around the age of 28, though most would tell you they wish they had started sooner. The reason is fairly obvious: the earlier you begin your retirement journey, the better funded it will be by your investment earnings rather than your wages. While many 50- and 60-year-olds regret not contributing earlier in their lives, there are still ways for them to catch up.
How do catch-up contributions help workers 50 and older to exceed the annual limit they can put into their 401(k)? What are the current limits set by the IRS, and how instrumental are these additional payments in helping those reaching retirement age make up for lost time? While these changes provide relief for those who have not adequately prepared for retirement sooner, should even those who do have well-funded retirement plans make the most of these strategies, as well?
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Retirement savers can contribute an extra $500 to their 401(k) in 2025, according to the IRS’ announcement earlier this month. Employees can contribute to their 401(k) plans in 2025 has increased to $23,500, up from $23,000 for 2024.
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The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), governmental 457 plans, and the federal government’s Thrift Savings Plan remains $7,500 for 2025. Therefore, participants in most retirement plans who are 50 and older generally can contribute up to $31,000 each year, starting in 2025.
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In addition, older workers can put more money than ever in their 401(k)s starting next year. Workers between 60 and 63 can make a super catch-up contribution of up to $11,250, while workers 50 to 59, or 64 and older, can make an additional catch-up contribution of up to $7,500, the same as last year.
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We asked Phill Battin, President/CEO, Ambassador Wealth Management, a values-based wealth management firm how catch-up contributions help older workers bridge the retirement gap. Battin advises high net-worth clients, applying a holistic strategy to advocate for their needs.
Q. How can catch-up contributions help older workers bridge the retirement gap?
A: In a 401(k), catch-up contributions can have a significant impact on retirement savings. For instance, employees who start saving an additional $7,500 per year until age 67 while earning modest interest rate of 7% compounded annually, can add $250k to their retirement nest egg.
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When you consider that according to the U.S. Bureau of Labor Statistics, the average retiree household spends around $50,000 a year in 2021, it is a significant sum. The catch-up contributions alone could fully fund five years of their retirement. For many Americans, having that extra money set aside could take care of unforeseen emergency expenses, allow for additional travel or freedom from worrying about running out of money.
Q. What is holistic financial planning?
A: Holistic financial planning goes beyond the typical cash flow analysis, retirement planning and budgeting. It involves succession, charitable and legacy planning as well as wealth transfer, insurance analysis, business succession, taxes and risk assessment, such as health, disability, outliving your money or business interruption risks. It is a comprehensive game of financial chess, looking at potential outcomes and variables. Good planning involves asking good questions about life goals and dreams, marriage, children and sometimes involves almost a therapeutic approach, helping to reduce anxiety or fears by identifying issues and planning for them.
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Holistic planning is an ongoing endeavor that evolves over time as clients move to different stages in life. It can mean anticipating potential needs and challenges or looking at opportunities to assist clients to achieve their goals.
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One of the most effective ways to work with individuals is by simply having meaningful conversations, getting to know your clients and being engaged in their life and success. It goes beyond being a financial planner, to a trusted advisor, a confidant.
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Clients don’t necessarily care how much you know until they know how much you care. So holistic financial planning encompasses a deep knowledge and understanding of your clients’ goals, what kind of legacy they want to leave and how well they sleep at night.
Q. How instrumental are the new contribution limits set by the IRS to help those reaching retirement age make up for lost time?
A: The new contribution limits will help offset inflation pressures down the road. Outside of the “super” catch up for those between 60-63 years old, most of the contribution limits are indexed to COLA.
Q. Why should even those who do have well-funded retirement plans make the most of catch-up contributions?
A: No one knows what the future holds with regard to health care costs, unforeseen expenses or longevity. People are living longer and one of the biggest concerns with retirees is out living their money. The real risk is not saving enough. We do not hear the typical retiree complaining they saved too much. At worst, you have additional funds to improve the quality of your golden years.
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Depending on your tax situation, you could lose a current tax deduction by not contributing the catch-up contribution or losing the ability to withdraw tax free later if you chose to do a Roth catch-up. So, even if you have a well-funded retirement plan, why miss out on additional savings opportunities or tax benefits?
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