According to research by
Fidelity Investments, only 13 percent of baby boomers are taking advantage of
the “catch-up” contributions to their retirement accounts. Catch-up contributions are allowed by the IRS
for anyone over 50 where an additional $5,500 in salary deferrals can be made
into a 401(k) plan.
finding is not a surprise. Other research has estimated that only about 10
percent of all workers overall are contributing the maximum $17,500 per year
that everyone, regardless of age, is allowed to contribute under IRS
guidelines. Since most workers do not contribute the maximum, the
“catch-up” 401(k) contribution established to encourage people to save more
when they are over 50 is largely irrelevant to them.
The low utilization of the
catch-up contribution is indicative of the larger issue that most Americans are
simply not saving enough for retirement. Research shows that the typical older
household enrolled in a 401(k) plan at work has saved about only about $120,000.
Low account balances such as this are not likely to be enough to pay medical
expenses in excess of what Medicare will cover. Despite having
too little money saved and prospects for a long life, apparently very few
people are feeling any urgency to save more.
The few who are taking
advantage of the catch-up provision are concentrated in higher-income
households. And those taking advantage of the catch-up are contributing a high
percentage of their salaries: 21 percent of men’s earnings, on average, and 23
percent of women’s earnings. These figures do not include any employer matching
amounts that may be available.
outreach to 401(k) plan participants is critical in helping them prepare for
retirement. Understanding post-retirement income needs can help workers plan
ahead and budget to save more now, so that they are not facing significant
challenges at retirement.