Will your 401(k) be enough?
If you read my blog, you know I’m the biggest cheerleader for 401(k)s, since those lucky enough to get an employer match earn free money towards their futures. But right now, experts are worried that for many people, their 401(k) won’t even come close to covering their expenses in retirement.
A 2011 study shows that folks in their 60s with a 401(k) have less than a quarter of what they need to maintain their standard of living in retirement. And 25% of Baby Boomers have no retirement savings at all. Combined with fewer pensions and the shaky future of Social Security, this missing money leaves would-be retirees working more years, scaling back their standard of living, and postponing retirement ’til who knows when.
It’s not a pretty situation. But remember: This is more telling of our economic times than it is of 401(k)s, and Boomers are suffering the most. For many of them, their 401(k)s plummeted in the recession and they haven’t had enough time to rebound. Plus, as part of the ‘sandwich generation’, they’re stuck between footing bills for kids’ college and elderly parents’ healthcare.
Point is, a 401(k) is a wonderful savings tool, if you know the right way to use it:
- Start ASAP. The younger you start, the more years your money will have to grow thanks to compound interest. Say you make $50,000 and contribute the expert-recommended 12% each year. After 40 years you’ll have nearly $1.4 million, but if you start later and invest for 20 years, you’ll have only $286,000. BIG difference.
- Go up a notch. Many folks contribute the minimum to their 401(k), often 6% of their annual salary to get their company’s 3% match. Experts recommend you contribute 10-15%. It may mean cutting back in other ways, but it’s easier to be thrifty now than poor in old age. And, if you’re 50+, you can start contributing beyond the $18,500 annual limit—do it.
- Save beyond a 401(k). Consider opening or contributing more to an IRA. Or try saving just $3 a day; if you invest it in an IRA, it could be worth hundreds of thousands of dollars when you retire.
- Calculate correctly. It’s easy to underestimate (or have no idea) how much money you’ll need to in retirement. A common measure is that you’ll need 85% of the salary you earn before retirement. Or, to get an actual figure, try this formula from human resources consultant Aon Hewitt, who says Boomers 46-54 will need 14.6 times their final salary, folks 31-45 will need 16 times, and those 18-30 will need 18.7 times.
- Have faith. At the same time this study came out, Fidelity reported that the average 401(k) account balance hit a 10-year-high. Kudos!
How are you preparing for your retirement?