Retail spending growth has firmed in recent months and there is evidence that this could continue through yearend. For example, holiday sales in 2016 increased by 3.0 percent on a seasonally-adjusted basis and Wells Fargo forecasts that this will rise to 4.0 percent in 2017. That outlook is supported by a new Gallup poll which found Americans plan to spend an average of $862 on holiday gifts this year, up 14.6 percent from 2016 and the highest reading since before the “Great Recession.”
However, there is also evidence that Americans are relying heavily on credit and dipping into their savings to fuel this increased consumption. Elevated confidence in both the economy and future earning power can help explain consumers’ recent spending habits but such behavior will not be sustainable in the long run without a more meaningful pickup in wage growth. More importantly, even if incomes do start to rise at a faster clip, any extra money would probably be better put to use in a tax-advantaged savings vehicle.
That is especially true for young Americans that have lots of time left before retirement for their invested savings to benefit from the power of compounding. Consider the difference between annual 401(k) contribution rates of 10 percent and 3 percent. Bankrate estimates that a hypothetical 25-year-old setting aside 3 percent of his or her income each year can amass $453,761 by age 70. Gradually raising that contribution rate by just 1 percentage point each year until it reaches 10 percent, though, can help generate nearly $830,000 in additional retirement savings.
It is also important to keep one’s 401(k) savings rate as high as possible in order to take full advantage of the matching contribution benefit that a growing number of employers offer. Indeed, more than three-quarters (77 percent) of 401(k) plans in America included some sort of contribution match in 2014, according to the most recent Investment Company Institute (ICI) and U.S. Labor Department data. However, even with this wide availability, many 401(k) participants keep their savings rate below a level that would receive their full employer-provided benefit, and in turn leave a lot of free money on the table.
Just look at an earlier Financial Engines study which estimated that a quarter of U.S. workers eligible for a match do not save enough to receive their full employer contribution, and that the average amount of match that goes unclaimed each year is $1,336 per worker. To some that may seem like a relatively small sum of money. However, when considered over your entire working career, the amount of forgone retirement savings is significant because passing on the full employer match means that you are also passing on the tax advantages and growth potential that would come from using your 401(k) to invest those extra funds.
Sources: Wells Fargo, Gallup, Investor’s Business Daily, ICI, Financial EnginesPost author: Charles Couch