It’s a generalization to say that the kids are out of the house, the dog has died, and it’s just you and the wife (or husband) by the time you reach age 50, but the reality is that many people do find themselves with more limited obligations…and, therefore, fewer expenses…when they reach the “big 5-0.” So, what are you going to do with all that extra money now? Take more vacations? Enjoy some more dinners out? Buy that boat you’ve long been eyeing?
There’s certainly nothing wrong with having some fun should you find yourself with a little more cash these days, but do not forget that you can also apply some of that money to improving the balances in your retirement plans. Until you reach the age of 50, you may deposit up to $5,500 per year into an IRA (note, however, that’s also a total of $5,500 to all of your IRAs, in case you have more than one). However, once you turn 50, you can add $1,000 to that yearly contribution limit, which means you have the ability to make an even bigger difference in the size of your retirement account at that time.
Let’s illustrate the impact of this extra, or “catch-up,” contribution you can make by turning 50. Let’s say, for the sake of discussion, that you have contributed nothing prior to turning 50 (which, hopefully, is not the case). If you contributed the $5,500 per year on the basis of 12, equal, monthly contributions of $458.33 per month, you’d have about $232,000 by the time you turned 70, if we assumed an annual rate of interest of 7%. Now, by adding the $1,000 to your contributions (again, spread over the course of 12 monthly contributions), your balance at age 70, assuming the 7%, becomes almost $275,000. This means that your extra $20,000 in contributions over the course of those 20 years adds $43,000 to the total of what you will have accumulated by age 70.
If you participate in a 401(k) plan at work, the contribution benefits associated with turning 50 are even more substantial; annual contribution limits for folks under age 50 are presently at $17,500 per year, but when you turn 50, you can add another $5,500 per year to your total 401(k) contributions. Assuming, then, that you’re already maxing the maximum contributions by the time you reach age 50, you can realize another $232,000 (again, assuming the 7% annual rate of return) by the time you’re 70 just on the basis of having made your annual “catch-up” contributions. Note that these limits often change, so depending on when you’re reading this, they may be different at that time (they are regularly adjusted upward to account for inflation).
The power of the time value of money is great…but it’s even greater when you actually have some, or more, to sock away. With average life expectancies for Americans sitting somewhere around 78 to 80 years of age, it’s prudent to take whatever “spare change” you can find and apply it to your wealth-building programs, and with the higher contribution limits afforded to you once you hit 50, your opportunities to reach your goals are better than ever.
Robert G. Yetman, Jr.