There are several types of late savers who are trying to make up for lost time:
Procrastinators with little or no past and current savings. This could be for any number of reasons including high monthly living expenses, overextended credit, poor spending habits, lack of financial discipline, and negative life events, such as unemployment, bouts of illness or disability, and divorce.
People who are currently saving for retirement but got a late start and are trying to make up for lost time. Perhaps they are saving more than they ever did before and are taking advantage of the higher contribution limits allowed for IRAs and tax-deferred employer savings plans. These are people who are now making a serious effort to save but need help catching up.
People who invested and lost some of their retirement savings. Perhaps they lacked diversification by not selecting different asset classes (e.g., stocks, bonds, and cash) or invested in risky high-tech start-up firms or tried unsuccessfully to practice market timing (i.e., trying to time investments to the highs and lows of the market). They may have also simply experienced market risk, where investment values track normal market fluctuations and the value of equity assets declines during market downturns.
The good news is that it's not too late to take action to secure your future. Remember that your investment time horizon is the rest of your life...not your retirement date. This means that, if you are 45 years old today and live to age 90, you have 45 years for your money to grow through the power of compound interest. Long time frames may also reduce market volatility.
If there was ever a good time to be a late saver, this is it. Thanks to the 2001 tax law, workers have more opportunities to save for retirement in tax-advantaged accounts than ever before. Increased retirement plan contribution amounts, coupled with extra "catch-up" savings and the power of compound interest, can greatly enhance a late saver's future financial security.
During the decade of the 2000s, there are increasing annual contribution limits for both Roth and Traditional individual retirement accounts (IRAs). There are also increasing maximum annual contribution limits for tax-deferred retirement savings plans available through employment: 401(k)s (for employees of private corporations), 403(b)s (for employees of schools, colleges, and nonprofit organizations), and Section 457 deferred compensation plans (for state and local government workers).
In addition, there are catch-up provisions (i.e., extra savings amounts) for people age 50 (by the end of the calendar tax year) and older for both IRAs and tax-deferred employer plans. Contribution limits and catch-up amounts are both increasing gradually through 2010, after which the 2001 tax law is currently set to expire (if Congress does not extend it).
Two other recent tax law incentives are the tax credit (of up to 50% of the amount contributed) for retirement contributions by lower income workers (Note: this is only in effect for five years from 2002 through 2006) and increased contribution limits for SIMPLE, SEP, and Keogh plan for self-employed persons.
There is a popular saying about taking responsibility for one's actions: "If it is to be, it is up to me." Workers are increasingly "on their own" to prepare for retirement as government and employer supports (e.g., defined benefit pensions and retiree health insurance) continue to erode over time. A helpful resource for late savers is the Guidebook to Help Late Savers Prepare for Retirement developed by the National Endowment for Financial Education. To access or download a copy of the Guidebook to Help Late Savers Prepare for Retirement, go to the Multimedia Access section of the NEFE Web site at www.nefe.org and click on "Resources for Consumers."