If you happen to be employed by an organization that offers a retirement plan like a 401(k), then congratulations! Not everyone has access to such an option. The Bureau of Labor Statistics reports that about three-fourths of civilian workers in the U.S. are offered a workplace retirement savings plan. The rest are essentially fending for themselves, figuring out their own way to grow a retirement nest egg.
Yet a bunch of people with 401(k) plans aren't making the most of them -- either by not contributing as much as they can, or in some cases, not contributing anything at all. And in some cases where workers are given the choice of how to invest these funds, they opt for the least productive investment choices offered by their plans.
As strange as it may sound, owning low-return assets or simply not saving enough for retirement isn't the biggest mistake you could make. There's a much bigger misstep a whole slew of future retirees are taking, which is costing them thousands of dollars every year. That's a future cost of tens of thousands of dollars, if not more.
Don't leave free money on the table
The usual and predictable tips still apply, of course. Those are:
- Start saving for retirement as soon as you possibly can.
- Invest wisely.
- Leave this money alone, no matter how desperate you may feel to take some of it out of the account prematurely.
This advice will always apply. None of these retirement savings rules are as important, however, as the one that literally puts free money into your 401(k) account. That's making sure that you qualify for as much of a matching contribution to your 401(k) as your employer is willing to make on your behalf. And to be clear, this is company money that's in addition to your own salary deferrals.
The idea is simple enough. Whatever you contribute to your own 401(k), your company will match it -- up to a limit. Although the amount of this match can and does vary, depending on the employer, you can expect a match of 50% to 100% of your own 401(k) contribution, up to between 3% and 6% of your salary. Mutual fund company and retirement plan administrator Vanguard says that 2023's average matched amount was 4.6% of workers' pay, which is in line with historical norms. Not bad.
And yet, these percentages alone don't quite do justice to the potential of employer matching contributions. Raw numbers paint a more relevant picture. Mutual fund company and plan administrator Fidelity reports that in 2024 workers contributed an average of $8,800 of their salary to their own 401(k) accounts, while employers chipped in an average of another $4,700 into each of these employees' 401(k) accounts.
That additional $4,770 was effectively an immediate -- and permanent -- 54% return on workers' retirement savings, even before achieving any investment growth through ownership of stocks or bonds.
If you socked away the extra $4,770 in your retirement account each and every year, and invested it in an index fund that achieves the S&P 500's average annual return of 10%, that would be a big deal. It would add more than $800,000 to your retirement account's balance after 30 years. And to be clear, that's in addition to the $1.5 million you'd have saved up just using Fidelity's figure for employees' own salary deferrals.
Even a small start is better than no start
It's admittedly easier said than done. You don't always earn enough money to feasibly contribute enough to a 401(k) to "max out" your employer's match. Indeed, most people don't in the early stages of their careers, and some people never do. That's not an indictment of your worth in the workplace. It's just a picture of economic reality.
Nevertheless, the battle for enough retirement savings is rarely won overnight with a windfall. It's won with nickels and dimes added up over a period of years that turns into decades.
So, do what you can right now even if it doesn't feel like much. Even if you're only able to contribute a few bucks of your work-based wages to your employer's 401(k) plan, you'll still receive your company's proportional match. That's something, and something to build on when you can start contributing more of your own money.
Bottom line? Just do it. A 401(k) plan with a matching component is hands-down the best way to start saving for retirement, even if you know nothing about investing and you simply leave your contribution as cash or in a nearly-cash instrument. Your company's match alone generates an impressive return on this money. And once you're ready and comfortable doing something more with these funds, your net returns will be even better.
