Catch-Up Contributions: How Much Difference Do They Make?


Today, we’re going to look at two ladies who are saving for retirement, Normal Nelly and Catch-Up Cathy. Each is 50 years old, earns the same salary, and has the same amount saved. Unfortunately, through no fault of their own, both Nelly and Cathy are a little behind on their retirement savings.

Because catch-up contributions become available at age 50, Catch-Up Cathy decides that she’ll reduce her living expenses a little and take full advantage of this savings opportunity between now and retirement at age 65.

Normal Nelly, however, decides that she’ll skip the catch-up contributions while otherwise maxing out her 401(k). Instead of lowering her living expenses now, she’ll simply lower them when she retires at 65.

Who will have the best shot at retirement? Let’s find out.

Catch-Up Contribution Rules

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) included a provision that allowed for workers 50 and older to contribute more toward their qualified retirement plans. These increased limits are what we all know as “catch-up” contributions.

Catch-up contributions make total sense – older workers tend to earn more as they’ve advanced in their careers, giving them more ability to save for retirement. Additionally, there’s a likelihood that their children have left the nest (or will soon), allowing over-50 workers to shift those expenditures into their retirement savings.

For 2022, workers age 50 and older can save an additional $6,500 per year in their 401(k), 403(b), or 457 plan. Not to be ignored, IRA accounts have a catch-up contribution available as well. For 2022, their catch-up limit is $1,000 per year. Finally, the ever-versatile HSA plan has a $1,000 catch-up contribution available too.

How much of a difference will these types of catch-up savings make? Let’s look at our example.


For simplicity and consistency, we’ll again use the same assumptions we’ve made in prior blog posts for our calculations. Inflation will be 3% and our expected portfolio returns will be 7%. Again, these assumptions are round numbers close enough to historical data for the purposes of our comparison.

For income, we’ll assume they each make $120,000 per year. To estimate their Social Security, we’ll simply input Nelly’s and Cathy’s income into the Social Security online quick calculator to arrive at a monthly benefit. For simplicity, we’ll also assume they’re both single.

For retirement portfolio income, we’ll once again use the 4% Rule. Of course, there are some limits to the 4% rule, but it’s great for these kinds of back-of-the-envelope calculations.

Living Expenses

For Nelly, we assume she skips the catch-up contributions but otherwise maxes out her 401(k) at $20,500 this year. For Cathy, we assume she fully maxes out her 401(k), including catch-up contributions. Given the current catch-up limit of $6,500, her total savings would be $27,000.

Catch-Up Assumptions 1

After we calculate and pay taxes, let’s assume each spends what’s left. For Normal Nelly, her monthly spending comes out to around $6,700 per month.

Since Catch-Up Cathy is saving more, she’ll obviously spend less than Nelly. However, since her catch-up contributions are pre-tax, she’ll also pay less in taxes. Her spending comes out to around $6,300 per month. That’s around $4,800 less spending per year than Normal Nelly.

Retirement Savings

To determine what Nelly and Cathy can spend in retirement, let’s make some assumptions about what they have saved. Again, we’re going to assume they’re a little behind on their retirement savings; life can be hard sometimes, so let’s not fault them for that.

Let’s say they have:

  • Cash Accounts: $ 25,000
  • Stocks & Mutual Funds: $ 75,000
  • Retirement Accounts: $ 250,000
  • Total Investments: $ 350,000

Total Savings at Retirement

If Nelly and Cathy plan to retire in fifteen years, how much will they have saved at that point? Given their current investments, we can make a simple calculation based upon their savings and projected growth.

Let’s not forget to add an employer match on their 401(k) contributions, since that’s common in the real world. For our example, let’s assume an employer match of 100% up to a contribution of 3%.

Given these assumptions, we expect Normal Nelly to have around $1.57 million saved at retirement, while Catch-Up Cathy will have $1.74 million.

Catch-Up Portfolio Projections

Retirement Income Available

Now that we know what Nelly and Cathy will have saved at retirement, let’s determine what kind of retirement income they can expect.

Catch-Up Income Projections

For Normal Nelly, we know she’ll have around $1.57 million saved. Using the 4% Rule, we can expect her investments to provide approximately $5,200 per month in retirement income. Adding her estimated Social Security income, that brings her total income at retirement to around $9,200.

Of course, these numbers are inflated. To make a fair comparison, we’ll have to adjust them back to today’s dollars. Using our inflation rate of 3%, we find that equates to a retirement income figure of around $5,900 per month for Normal Nelly.

When we compare that to her pre-retirement expenses, we find that she’ll need to reduce her living expenses by about 10% when she steps away from work to have a sustainable retirement.

So, what about Catch-Up Cathy? She’s already reduced her living expenses to save more for retirement. Knowing that she’ll have approximately $1.73 million saved at age 65, we can expect her portfolio to provide around $5,800 per month at that time. Adding in her Social Security will give her around $9,750 per month in living expenses.

Adjusting for inflation, we find that Cathy’s retirement income (in today’s dollars) comes out to approximately $6,300 per month – almost exactly what she’s spending today.

By the way, if you want to run these calculations for your situation, I’ve created an inexpensive, downloadable spreadsheet you can find at You can even adjust your savings levels, just like we’re discussing today.

Is There a Difference?

Since we’ve made our calculations based upon what they’ll have available at retirement, we know that both Nelly and Cathy can make retirement work. However, the 4% Rule does have limitations. If we run a Monte Carlo analysis for Normal Nelly and Catch-Up Cathy using this data, we find that they have very high probabilities of retirement success: 93% and 94%, respectively. Of course, these numbers don’t factor in one-time expenses like home improvements, car purchases, nursing home costs, or changes in their retirement spending as they age.

Catch Up Contributions for Retirement

In our simplified comparison, we find that each retiree ends up in a similar place using different means. The question becomes: do you reduce your living expenses before retirement or after? Again, we find ourselves discussing retirement income replacement ratios.

It’s a common practice in financial planning to reduce living expenses by 20% in retirement. It’s a great place to start for those who have otherwise not spent time budgeting. Indeed, many retirees will spend much less than 80% of their pre-retirement living expenses when they finally stop working.

However, in my experience, plenty of retirees do not see a significant drop in living expenses, especially in the first several years. During this time, travel and new hobbies can expand parts of the budget while others may contract after leaving the workforce.

Of course, our simplified example does not account for other factors such as paying off a mortgage before retirement (or not). Neither do we factor in likely expenses such as home improvements, car purchases, or long-term health care costs. If you retire at 65, there’s a good chance the car will wear out or the air-conditioner will break at some point.

So, does this mean you should skip the catch-up contributions? Absolutely not. If you have room in your budget, I highly recommend it, especially for those of you in a higher marginal tax bracket. However, all else being equal, why not save more not and have more options later?

If you need help figuring out how much you’ll need to save for retirement, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.
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