Why you should save in your 401k
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Participating in your employer’s workplace retirement plan is one of the best ways to save for retirement.
Here are the top 6 reasons to participate in your employer’s retirement plan.
Convenient: Contributions are made automatically with every pay period.
Flexible: You decide how much you want to contribute per paycheck.
Uncomplicated investment choices: Typically, there are just a few investment choices. You can usually choose to invest in a Target Date Retirement fund (a fund of investments that automatically become more conservative over time as you approach the target retirement date) or choose from a few curated funds if you’d like to choose your own investments.
Your contributions always belong to you: If you leave employment, the contributions you made and the growth of those contributions always belongs to you. You can move that money into an IRA or into a new employer’s retirement plan, if you leave your current employer. But rest assured, that money is yours.
Get extra contributions from your employer: Often, employers will make a contribution to your retirement account. This contribution can come in the form of an elective contribution (they decide how much to contribute at the end of each year) or a match (they match your contributions up to a threshold). There may be restrictions on this money, such as length of employment, so if you leave employment before the restrictions have been met, you may not get to take all of this money with you. Your retirement plan custodian will keep track of this for you.
Be responsible for your future self: Social security is only expected to cover about 1/3 of the typical worker’s needed income in retirement. You’re responsible for funding the other 2/3 of income you’ll need for retirement. The sooner you start saving, the more time you’ll have for your money to grow for you in the form of compound interest.
Many employers will automatically enroll all new employees into the plan at a certain threshold, like 5%. You can opt out or change your contribution level, but many more employees participate in their plans because of this automatic enrollment. In addition, I almost always recommend that clients enroll in the automatic percentage increase each year, even if it’s 1%. Most clients don’t even notice this slightly larger amount being withheld from their paychecks, especially if they received a raise.
All the cool kids are doing it!
The participation rates in workplace retirement plans have increased substantially over the years, which is very good news for future retirees. According to the Vanguard study, “How America Saves Report 2024”, 83% of workers age 25-34 participate in their workplace retirement plan. 86% of those aged 35-64 participate. Join the crowd and help prepare your future self for retirement.
In 2023, employees contributed on average 7.4% to their retirement accounts, according to the Vanguard study. Participants age 25-34 contributed 6.7% to their retirement accounts, while older participants tend to contribute at higher rates (those age 55-64 contributed 8.9%). During 2023, 14% of participants saved the statutory maximum amount.
Considering both employee and employer contributions, the average total participant contribution rate in 2023 was 11.7%.
What percentage of your salary are you saving for retirement?
If you don’t know how much you are saving, check your HR portal right now to learn more and consider enrolling in a 1% automatic annual increase.
How much should you save for retirement?
Fidelity offers a simple guideline.
How does your retirement savings compare to the Fidelity suggestions above?
If you’re not happy with your savings rates, take action. Increase it by 1% right now and see if you notice the difference in your paycheck.
What percentage should I save?
Depending on your age when you start saving, the percentage you should save varies. Generally, experts say you should save between 10-15% of your pretax income for retirement.
Can’t save at that level yet? That’s ok, start somewhere! Even starting at 1% or 5% of your paycheck will make a difference over time.
Talk to your financial advisor for advice specific to your situation. Don’t have an advisor? Reach out to see if we might be a fit for working together.
