Is It Too Late to Catch Up on Retirement Savings if You're 55?

Did you ever get hit with a $25 late fee for a bill that you meant to pay, and had enough money to pay, but just kept forgetting about? You know that it's your fault, but it still feels kind of unfair.

That's kind of how it feels to realize late in your career that you're behind in saving for retirement. You know that if you had only thought about it sooner, you'd be better off financially, but now it's too late.

Except it's not actually too late. Just like with a late payment fee, you might have to take a small hit, but if you take action now, you can still protect yourself from additional financial consequences.

Here's what 55-year-olds need to know about catching up on their retirement savings.

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It's never too late

That's the first thing to remember: It is never too late to start saving for retirement, even if you're 55, 60, or even older. And you're not alone: Research from The Motley Fool suggests that nearly half of U.S. households haven't saved enough for retirement.

Because of the power of compound interest, savings with a longer time horizon will grow exponentially larger than those with a short time horizon. For example, an investment of $1,000 that earns just 5% annual interest will be worth only $1,276.28 in five years, but $4,321.94 in 30 years.

But even if you're 55, you still have 12 years before you can start drawing full social security benefits at age 67, and you have 20 years before you need to start taking required minimum distributions from your tax-deferred retirement accounts at age 75. Even at 5% annual interest -- which is lower than the average performance of the S&P 500 -- an investment will more than double in just 15 years (so, $1,000 would become $2,078).

So the most important thing is to start saving as much as you can as soon as you can. But what's the best way to do that?

Image source: Getty Images.

Catching up

The first thing is to check whether you have any options for getting additional money beyond your personal contributions to a retirement account. Many businesses will match or partially match their employees' retirement fund contributions up to a certain amount. Your best bet is usually to try to max out those limits. Even if your employer offers just a 25% match, that means your $1,000 contribution is already $1,250 -- almost the equivalent of having earned five years of 5% interest!

Putting your savings into a tax-advantaged retirement account like a traditional IRA or a Roth 401(k) may also be wise, although you should consult with your financial advisor to figure out what kind of tax-advantaged account makes the most sense for your situation, as different types of accounts are handled in different ways.

Finally, be aware of the higher "catch-up" contribution limits for tax-advantaged accounts for workers age 50 and older. While the standard limit for a 401(k) contribution is $24,500, workers over age 50 can make additional catch-up contributions of $8,000, and workers age 60 to 63 may be able to make "super catch-up" contributions of $11,250 over the standard limit.

John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.