Save as much as you can
For most people, the biggest factor in the size of your 401(k) balance at retirement isn’t your rate of return, but the amount you save. Consider two employees who each earn $100,000 a year, get 3 percent raises each year, and earn 5 percent on their 401(k) plan. One contributes 5 percent of his salary each year; the other contributes 8 percent. After 20 years, the worker who invests 5 percent of her salary a year will have $222,386. A worker who invests 8 percent will have $355,818.
“Anytime you can increase your savings is always a good idea,” says Michael Foguth, president and founder of Foguth Financial Group in Brighton, Mich. “So, yes, maxing out a retirement account is a good strategy to boost savings quickly.”
And if you can afford to save more, turbocharge your savings by taking advantage of the catch-up contribution if you’re over 50, adds Foguth. “It allows you to save more money in your older working years, which is critical because you’re likely closer to retirement,” he says.
And if can’t afford to max out your 401(k) right now, but that’s your goal, don’t give up. Do it gradually over time, says Michael Ingram, CFP, partner and wealth advisor at Octavia Wealth Advisors in San Diego.
“One strategy I recommend using for plan participants to help them increase their contribution rate is to enroll them in the ‘auto-increase’ feature most company 401(k) plans offer,” Ingram says. “The way the auto-increase works is it increases your contribution automatically each year by 1 percent until you reach a predetermined cap rate of 10 percent to 15 percent.”
Investing in your 401(k) can also result in big tax savings. For example, if you’re 50 or older, earn a $100,000 salary, and contribute the maximum $26,000 to a 401(k), your gross income will decrease to $74,000. Your other deductions, such as the standard deduction, can reduce your taxable income even further.
Don’t forget the match
Another big benefit of a 401(k) plan is that most employers help you save by contributing to your account via matching contributions. These regular employer-paid contributions amount to free cash and help you boost both the amount of money you save and your investment returns. For example, it’s common for employers to match 50 cents for every dollar you put in – some match dollar for dollar – up to a 6 percent of your salary. It’s an incentive for you to save.
The extra money from your company can add up fast. If you earn $100,000 and your company chips in 50 cents for every dollar you put into your 401(k) up to 6 percent, you’re getting an additional $3,000 more deposited into your account per year.
“A company match should also be a target for you to be saving each and every year,” Foguth says. “Company-matched 401(k) plans are free money, so at a minimum, always make sure you’re putting in up to what your company will match. For example, if your company matches 5 percent, make sure you’re contributing at a minimum of 5 percent to your 401(k).”
And employers continue to chip in and help with their employees’ retirement savings, according to Fidelity Investments. Over the last four quarters, a record 88 percent of 401(k) savers received an employer contribution, with employers contributing an average of $4,030 per account over the last 12 months.
What’s even better is employee contributions to your 401(k) don’t count against your personal contribution maximum. And remember, what you save today will help you down the road, says Ingram.
“It is never too late to start saving for retirement,” says Ingram. “If you feel you are behind, look for other expenses in your life to cut back on or maybe even take out a loan if necessary. One piece of advice I like to tell clients who are deciding if they should fund their retirement account versus pay for their kids’ college education is I always remind them, ‘You can borrow money to go to college, you cannot borrow money for retirement.'”