Two-thirds of Americans surveyed by Bankrate said that they have cut back on their monthly spending, not too surprising considering the recent slowdown in retail sales growth. A plurality of respondents cited “saving more” as the main reason they are limiting their consumption, an encouraging development since so many people still lack an emergency fund. Further, surveyed Millennials were by far the most likely age group to say that they are cutting back on spending in order to set more money aside. That is great news because the earlier a person can start saving and investing for retirement the better, and even small increases can result in a big boost to one’s nest egg.
Consider the difference between annual 401(k) plan contribution rates of 10 percent and 3 percent. Investor’s Business Daily estimated 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 eight in ten 401(k) plans in America include some sort of contribution match, according to the most recent Investment Company Institute and U.S. Labor Department data.
However, even with such 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. The average amount of match that goes unclaimed each year is $1,336 per worker, according to the report, which equals a significant amount of forgone retirement savings when considered over an entire working career. Moreover, 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: Bankrate, U.S. Census, IBD, ICI, U.S. DoL, Financial Engines
Post author: Charles Couch