Put Off 401(k) Contributions If You Want to Put Off Retirement
Retirement savings is important if we ever want to retire. As hard as it may be to believe, roughly 2 out of 5 Americans are not investing for their future. We believe the importance of saving in a retirement plan is more necessary than ever due to the decline in pensions, uncertainty with social security, high healthcare costs, and more. Industry research indicates that 55% of American households are at risk of not covering essential expenses in retirement. In addition, one-third of “retirees” continue to work after they retire. Here’s a personal story that demonstrates the importance of starting early and saving in a 401(k) plan.
I once received a call from a 54-year-old man who wanted to discuss his retirement savings plan. Let’s refer to him as “Mr. Smith.” It was a cold and windy winter day and we were short-staffed. The phone starting ringing off the hook and one of the callers was Mr. Smith. The discussion started by him asking if he was on track for retirement. As we went over the details of his plan, he just had a small savings account and anticipated relying solely on his social security to carry him through retirement. This was a very difficult discussion because he’d been working for the same company for over 30 years, had a 401(k) plan available to him but never took advantage of it. That’s when I began explaining the critical importance of saving in a 401(k) plan.
Retirement is not a destination but rather a journey — one that should be funded by multiple avenues of saving.
For example, you don’t plan a road trip across country and only account for stopping at one gas station. While you are planning for your retirement, it is important to map out every contributing factor. What will your expenses be? Where will your income come from? What happens if you live well into your 90’s?
When analyzing your essential expenses, your goal should be to cover them by guaranteed income sources like social security, a pension, and annuities. Your 401k and other savings should cover the discretionary expenses. As a rule of thumb, you should plan to have at least 10 times your final salary set aside for retirement. Saving 10-15% of your income in a 401(k) is an excellent way to achieve those goals.
This, of course, assumes starting at a younger age and also includes any company match/ profit sharing you might receive. In fact, most employers offer a matching contribution to their 401(k) plan, which is literally free money you’d be leaving on the table if you don’t contribute. Even if you are not able to save the 10%-15% of your income at this point, it is important to, at a minimum, take advantage of your entire company match. All of this will add up over time to help get you to that goal of having a comfortable and long-lasting retirement savings.
In Mr. Smith’s case, starting so late in life was going to make that gap difficult to close. Luckily for him, being at the company so long and over age 50 allowed him to allocate the maximum to his 401(k) including catch-up contributions. Including catch-ups, the 2017 maximum contribution is set at $24,000. This, coupled with pushing his original retirement age from 62 to 66, helped him close the gap enough where he would be comfortable. You see, Mr. Smith was fortunate enough to have his essential expenses pretty well covered by his social security. He had his home paid off and lived very frugally, spending little to no money on unnecessary items such as extravagant travel. The moral of the story is that it is important to start off young and save as much as possible as early as possible. Waiting to save until later in life, will only make it more difficult, if not impossible, to retire and live comfortably. The last thing you want to happen is to outlive your retirement assets!