Catch-up contributions help retirement

A considerable number of older investors are well on their way when it comes to saving for retirement. According to a recent survey by TD Ameritrade Holding Corp., 45% of working baby boomers are contributing to their employer-sponsored 401(k)/403(b) plan or are funding their individual retirement accounts.

But while many baby boomers are on the right track, some Americans over 50 are missing out on an important opportunity that could further help enhance their retirement savings: catch-up contributions.

MORE FOR THE IRA

A catch-up contribution allows investors 50 and older (by the end of the calendar year) to make additional contributions to their IRA or employer-sponsored retirement plans.

These contributions are in addition to regular contribution limits.

For 2012, those limits are:

• 401(k) contribution of $17,000, with an additional $5,500 catch-up contribution (total contribution: $22,500).

• IRA contribution of $5,000, with an additional $1,000 catch-up contribution (total contribution: $6,000).

According to the survey, among the 50-and-over crowd, 68% aren't taking advantage of the opportunity. Half said that they are skipping out because they simply can't afford it, but another 21% said that they had never heard of it.

Financial advisers have an opportunity to educate their clients about the benefits of catch-up contributions. By encouraging clients to save as much as they can today in tax-deferred vehicles, advisers can help prepare them for retirement tomorrow.

NOT TOO LATE

Just 26% of the baby boomers surveyed said that they are confident that they will reach their savings goals by the time they retire, while the other 74% said that they aren't completely confident that they have saved enough for their golden years.

Even if someone can't save the full amount, a partial savings each month can make a difference. Simple changes in everyday spending can add up over time.

When planning for retirement, every dollar counts, especially when saving in a tax-deferred vehicle.

For example, instead of a $4 latte, how about drinking a $2 cup of coffee?

That is a savings of $60 a month, $720 a year, and over 20 years, it could amount to more than $24,000 in additional savings (if the leftover money is regularly invested and grows at a 5% annual rate).

Now, if a client makes an additional $1,000 a year contribution to an IRA starting at 50, by the time he or she turns 70, which is the last year you can contribute to a traditional IRA, he or she will save an additional $34,000 toward retirement ($1,000 a year, 20 years, 5% rate of return).

If the client fully funds an IRA with $6,000 a year from 50 through 70, that could mean an additional $208,000 for retirement at 70 ($6,000 a year, 20 years, 5% rate of return).

With tax season upon us, now is the perfect time for advisers to conduct a retirement checkup with their clients to uncover opportunities such as catch-up contributions. Many of the documents that they need to complete their returns are the same ones needed to execute a retirement checkup.

The reality is that 70% of people today work during retirement. Some do so because they want to; others have to because they haven't planned enough or saved enough to retire comfortably.

By helping your clients take advantage of strategies such as catch-up contributions, you will help to ensure that they will have more options to decide what kind of retirement they really want.

Lule Demmissie is managing director of retirement for TD Ameritrade Inc., a broker-dealer subsidiary of TD Ameritrade Holding Corp.