In the early years of 401(k) saving, reaching a six-figure balance can feel impossible. You see the money deducted from your pay, and with little momentum in your retirement account balance, you might naturally wonder if all that saving is worth it.
Rest assured, you will see the value of those contributions eventually. But you don't have to take my word for it -- compelling data from a new retirement study sheds light on an easy secret to building a big balance in your 401(k).
Continuous savers are richer
That study, published by 401(k) plan administrator Fidelity, analyzes balances and trends across more than 35 million tax-advantaged retirement accounts.
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Data points that stand out from the analysis are the average balances for those who've saved for five, 10, and 15 consecutive years in their workplace 401(k). All three numbers are higher-than-average 401(k) balances across the board. Specifically:
- The average balance for all 401(k)s in the study is $121,700 as of March 31, 2022.
- Savers who've participated in a workplace 401(k) for five years continuously have an average balance of $257,400.
- Savers who've participated in the 401(k) for 10 years in a row have an average balance of $383,100.
- The 15-year continuous savers have $482,900 on average in their 401(k)s.
The takeaway? Contribute continuously to achieve a higher-than-average 401(k) balance.
Mathematically, you can amass $482,900 in 15 years by contributing about $1,600 monthly and earning an average, inflation-adjusted return of 7%. That $1,600 includes your employer match.
You can reach that balance with much lower contributions with a longer timeline. If you have 20 years to save, the total monthly contribution required is about $980. Over 30 years, you'd need to contribute just $426 monthly.
How to contribute continuously
Fortunately, the features of your 401(k) are geared toward continuous contributions. Once you specify your contribution rate and your investment selections, the funding and investing happen automatically.
There are two main reasons you'd shut off those automations. You might pause your contributions if you're in a cash flow crunch. Or you might leave your job and lose access to the 401(k).
Managing a cash flow crunch
You can't prevent financial emergencies. You can only plan for them. The best approach here is to build up your cash savings balance.
You'd use that cash as your first line of defense against temporary income shortfalls. That should reduce your reliance on pausing retirement contributions or, worse, having to borrow from your 401(k).
Target a cash savings balance that's sufficient to cover three to six months of your living expenses.
Leaving your job
Separating from your employer is a more complicated problem. If you're moving to a new employer that has a 401(k):
- Set up contributions to that account as soon as you are eligible.
- In the interim, save your regular contribution amount to an IRA or a taxable brokerage account.
- Consider rolling your old 401(k) balance into the account with your new employer.
If you don't have a 401(k) after you leave your job:
- Open an IRA. Find one that supports automated contributions and investments.
- IRA contribution limits are lower than 401(k) contribution limits by a long shot. To maintain your total contribution level, you may have to max out the IRA and save additional amounts to a taxable brokerage account.
- Consider combining your old 401(k) into your new IRA.
Save now, save later
The secret to amassing a healthy balance in your 401(k) is surprisingly simple: Keep contributing. The momentum will be slow at first -- but have faith and press on. In five or 10 years, you will see real wealth building in your retirement account.
