The 401k is an option offered by the employer so the employee can save for retirement. The contributions are deposited pre-tax and taken right out of the paycheck. There is no need to worry about remembering to make them. The money saved can help to supplement retirement, or for those who are not counting on Social Security, it can be all of the retirement savings. In today’s environment it is important to save money. By making regular contributions to an employer plan, at least enough to get the match, a person can save for the long term and will be able to enjoy his or her retirement.
Too often people think that just saving a little bit will help them to get through retirement. And most people find out when they are in their late 50’s that they have not saved nearly enough. Instead of finding out you have too little, plan to find out you have more than you need.
Increasing savings does not have to be drastic. For example, take someone who at age 35 is making $50,000 per year, and saving just 3% of his income (he also gets the employer 401k match of 3%). So far he has saved $7,000. He receives cost of living raises of 3% each year, and gets an average of 7% rate of return, after 25 years (when he reaches age 60) he will have $172,148 saved (not including employer matches). If he were to increase his contribution by just 1%, he could boost those savings to $223,187. Reducing his bi-weekly take-home pay by $15 per paycheck he is able to save a little over $51,000 extra dollars for retirement.
$223,187 seems like a lot of money. But considering many people will live past age 90, there is no way he could sustain himself for over 30 years without some other sort of aid. Instead, increasing those savings by 1% each year, until he hits a maximum of 16%, will help dramatically. The next 25 working years will allow him to set aside an additional $521,000; a total of just over $693,000 in his account (plus the employer match). Even though more will be going to his retirement account, the cost of living increases will offset that and his take-home pay will continue to increase. Check out the NYT for a great interactive retirement calculator and do your own estimates.
Saving money is a great way to thoroughly enjoy your retirement. Saving even more is a way to make sure you can do everything you desire during retirement. With the future of Social Security uncertain, now is the time to step up contributions to a retirement account. If nothing else, increase your contributions by 1% this year. I’m certain you will not miss those few dollars in each paycheck. Next year, try to do the same. In the end your lifestyle now won’t change, but your retirement lifestyle will be far better.
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