The Most Common Error Employees Make
For Immediate Release
August 10, 2012
And guess who’s to blame?
Tens of millions of American workers have access to an employer-provided retirement plan. While most participate, the majority don’t contribute the maximum they are permitted.
That’s too bad because, as is often said, whatever you gain is equal to what you contribute. But in the case of retirement savings, you can actually gain even more than what you contribute.
Thanks to the power of compounding and the employer match, the amount you’ll have at retirement can grow exponentially. You’ll be truly amazed when you see the results.
Unfortunately, only 9% of the nation’s 60 million workers who are eligible to participate in 401(k) plans contribute the maximum, according to the Employee Benefit Research Institute. The Plan Sponsor Council of America says only 5% of employees do so. And a recent survey by CouponCabin found that 73% of Americans aged 18–34 — the group whose long-time horizon offers them the best chance of creating wealth by retirement — don’t invest for retirement at all.
So let’s get it right. You can contribute a maximum of $17,000 to your retirement at work this year. That’s $500 more than last year. And if you’re 50 and older, you can contribute an additional $5,500 — also up $500 from last year — for a total of $22,500. (These ceilings hadn’t been raised since 2009.)
For sure, many people don’t contribute because they think they can’t afford to. Others stopped contributing after suffering shocking losses during the 2008 credit crisis. Regardless of why you might not be contributing, the fact is that people don’t have much money in their retirement plan simply because they don’t contribute to it or they contribute far too little.
And it’s not merely a matter of working hard. In Chapter 3 of The Truth About Money, I explain how working smart matters, too.
Example: If you save $150 per month at a 5% annual return, in 40 years you’ll have $228,903. If you double your monthly savings to $300, you’ll double your return, to $457,806. To do that, of course, you’d have to work harder. But most of us work hard enough already.
So instead, let’s work smarter: If you save the same $150 monthly but earn 10% annually instead of 5%, your account in 40 years will stand at $948,612 — quadruple what you’d have earned at 5%. That’s the result of working smarter with the help of compounding interest. And 10% isn’t unreasonable. Historically, the S&P 500 index has averaged that rate since 1926.
If you’re really smart, you’ll do both. By boosting your monthly savings to $300 and earning 10%, you’ll accumulate $1,897,224.
How does this lesson apply to your retirement plan at work?
You simply must invest everything you can into it. Aim for the maximum. You say you can’t afford more? I say you can — and you must — or you won’t be able to retire comfortably. Almost everyone can find ways to shave expenses in order to put more into their retirement savings.
To meet your goal, you’ll need even more than your retirement savings plan at work. You’ll likely need additional savings and investments, but I’ll leave that for another discussion.