Saving for retirement isn't easy, and it's no secret that the majority of workers are behind on their savings. Roughly one-third of Americans have absolutely nothing saved for retirement, according to a recent survey from GOBankingRates. That's a big problem, especially considering the average retirement costs upwards of $700,000.
Image source: Getty Images.
Part of the reason why so many people are falling behind financially could be that they're not taking advantage of one of the most powerful tools in their arsenal: a 401(k). According to the Bureau of Labor Statistics, 59% of U.S. workers have access to a 401(k). Yet among those who do have a 401(k), only 69% are actively contributing to it.
Making the most of your 401(k) is one of the easiest and most effective ways to prepare for retirement, and if your employer offers matching contributions, you could potentially double your savings with zero effort on your part. Whether you're just getting started saving or are already enrolled in your 401(k), there are steps you can take to maximize your savings and set yourself up for financial success.
Participation is the first step to success
Sometimes the hardest part of saving is just getting started. When workers are not automatically enrolled in their 401(k), only about half of them will opt into it, according to a Fidelity Investments survey. However, when employers automatically enroll new employees, 401(k) participation jumps to 87%. Those who were automatically enrolled also tended to save more over time: Fidelity found that among workers who were automatically enrolled in their 401(k)s, the average savings rate rose from 4% of wages in 2008 to 6.7% in 2018.
Of course, you don't have control over whether your employer auto-enrolls new employees in its 401(k), but you can choose whether and how much to contribute yourself. And while increasing your savings rate from 4% to 7% may not sound like a big leap, it can amount to tens of thousands of dollars over time.
For example, say you're earning $50,000 per year, you just started contributing 4% of your salary -- or $2,000 -- to your 401(k) each year, and you currently don't have anything stashed away in your retirement fund. After five years, you increase your savings rate to 5% per year, and after 10 years, you up it again to 6%. Assuming you're earning an average annual return of 7% on your investments, here's what your savings would look like over time:
| Years | Savings Rate | Total Contributions per Year | Total Savings Accumulated |
|---|---|---|---|
| 0 (today) | 4% | $2,000 | $0 |
| 5 | 5% | $2,500 | $12,307 |
| 10 | 6% | $3,000 | $32,644 |
| 20 | 6% | $3,000 | $108,566 |
| 30 | 6% | $3,000 | $257,918 |
Data source: Calculations by author.
If you had continued to contribute 4% (or $2,000) per year, and all other factors remained the same, after 30 years you'd have ended up with just $202,000 -- a difference of more than $55,000.
Also, if your employer matches your contributions, you could stand to gain even more. In this example, say your employer will match 100% of your contributions up to 3% of your salary, which amounts to $1,500 per year. This is how your savings would look over time with that additional $1,500 per year, assuming you're still earning an average annual return of 7% on those investments:
| Years | Savings Rate | Total Contributions per Year (With Employer Match) | Total Savings Accumulated |
|---|---|---|---|
| 0 (today) | 4% | $3,500 | $0 |
| 5 | 5% | $4,000 | $21,537 |
| 10 | 6% | $4,500 | $54,820 |
| 20 | 6% | $4,500 | $174,365 |
| 30 | 6% | $4,500 | $409,529 |
Data source: Calculations by author.
By continuing to contribute just 4% of your salary plus the additional $1,500 per year without increasing your savings rate, you'd end up with around $354,000.
What if you're already enrolled in your 401(k)?
If you're already enrolled in your 401(k), then you've taken the most important step. But that doesn't mean you can sit back and relax just yet. Most employers set the contribution rate fairly low -- typically around 3% -- which won't be enough in the long term if you want to save enough to retire comfortably.
That means it's your job to determine how much money you should contribute to your retirement fund. At the very least, make sure you contribute enough to earn the full employer match -- otherwise, you could be leaving money on the table. Then try using a retirement calculator to figure out how much you should save each month to reach your long-term goals.
It's a good idea to test out a few different calculators to get a better estimate of how much you'll need. All calculators are different (some factor in Social Security benefits, for example, and they may or may not account for factors such as taxes and inflation), and you'll likely get different results depending on which one you use. Keep in mind that all of these numbers are estimates, but they're a good starting point.
Once you have a ballpark idea of how much you should be saving each month, adjust your 401(k) contributions accordingly. Also remember to tweak your contributions when you experience any important financial event, such as when you get a raise or start a new job with a higher salary.
It's easy to put off retirement saving for another day, waiting until you start earning more money or have more time to sit down and figure out how much you should be contributing. But the longer you wait, the more valuable time you lose -- and that could ultimately cost you tens of thousands of dollars down the road.
