Many Americans are well aware that they struggle with old-age financial preparedness. A plurality of U.S. adults surveyed this month by Bankrate, for instance, said that “not saving for retirement early enough” has been their biggest financial regret. The frequency of reported remorse about a late start increased consistently with age. There are several possible explanations for this but perhaps the most encouraging is that the growing use of automatic enrollment has caused many young Americans to start setting aside money for retirement at an earlier stage in life. Indeed, employers can automatically deduct elective deferrals from an employee’s wages unless the worker makes an election not to contribute or to contribute a different amount, according to the Internal Revenue Service.
Auto-enrollment is effective because people are very unlikely to opt-out of a retirement savings plan after being “nudged” into participating. In fact, behavioral economics research has demonstrated that on average only around one in ten workers actually opt out of a plan after being automatically enrolled. More importantly, the sooner people can start saving for retirement with a 401(k) the better because the amount of money that can be amassed in these tax-advantaged vehicles is substantial. For instance, there are now more “401(k) millionaires” than ever before, according to recent data from Fidelity Investments. Specifically, there were 157,000 401(k) savings accounts administered by Fidelity at the end of the first quarter of 2018 with a balance of at least $1 million. That is a 45 percent jump from just one year earlier and likely a figure that has continued to rise in the second quarter.
To some such a large retirement nest egg may seem out of reach but most 401(k) millionaires in the Fidelity sample have been saving for about 30 years. That highlights the need for an early start and is therefore great news for the growing number of Americans that began setting money aside in a 401(k) in their 20s. However, savers of all ages should understand that every contribution, no matter how small, can have a big impact on their standard of living in retirement. For example, an earlier Fidelity Investments analysis estimated that a hypothetical 25-year-old could gain a “whopping $100,464 of extra retirement income” simply by contributing another $33 to his or her 401(k) account each month. Greg McBride, Bankrate’s chief financial analyst, added that “Time is your greatest ally when saving for the future … To workers of all ages, there is no better time than the present to increase your 401k contribution or fund an IRA.”
Sources: Bankrate, U.S. IRS, Fidelity InvestmentsPost author: Charles Couch