An Ignoble Experiment: 1 in 4 People Make This Mistake in Their Retirement

2015/10/20

1 in 4 People Make This Mistake in Their Retirement

You've probably heard plenty about the common mistakes people make with their workplace retirement plans like cashing out their 401(k)s when they leave a job or taking out a 401(k) loan in a financial emergency.

But there's one other mistake that will leave any dedicated retirement saver scratching their head. A recent study of 401(k) participants reveals that as many as one in four of us miss out on at least part of our employer match in our 401(k)s because we aren't contributing enough to receive the entire match. The study estimates those workers are leaving an estimated $24 billion—that's billion with a B—in retirement savings on the table! That breaks down to $1,336 per worker, equal to 2.4% of their annual income.

That kind of money could go a long way to bridging the nationwide retirement savings gap, not to mention your own personal savings shortfall. The study projected the impact of that missing $1,336 employer contribution based on a super-conservative rate of return. Over 20 years, they estimated that annual loss would grow to nearly $43,000.

That might not be enough to get your blood boiling, but we did our own estimates based on the long-term growth history of the stock market, and the loss could actually be almost twice as much—$84,000!

For younger workers, the loss is even greater. With 10 more years of compounding interest, that $1,336 per year could grow to more than $240,000!

The $20 Per Weekly Paycheck Difference

So why aren't workers taking full advantage of their employer match? After all, it's an instant and guaranteed 100% return on your retirement investment money, and that's a deal you won't find anywhere else.

The most likely reason is that it isn't truly free money. You have to put your money in first to get the employer match. But increasing your 401(k) contribution is probably more affordable than you think.

For example, a worker making $45,000 who files his income taxes as single with no dependents could increase his 401(k) contribution from 3% to 6% for only $19 per weekly paycheck! Because 401(k) contributions are made pretax, bumping up his contribution reduces his taxable income. So even though he's putting in $1,350 more to his 401(k) each year, it's only costing him $988.

The $2,700 Investment That Costs Less Than $1,000

Not only that, his employer is kicking in more for his retirement too. The most common employer match is dollar for dollar up to 6% of the employee's salary. Now that our example employee is maxing out that match, his employer is also contributing $1,350 more to his retirement.

What does that do to his retirement savings projections? That's the most exciting part! After 30 years, that $19 per week means our sample worker, making an average income (that never changes, by the way) will have a retirement nest egg of $994,000. That's $488,000 more than he would have if he'd kept saving at a 3% rate!

If this guy can save nearly $1 million by contributing less than $40 total of his weekly paycheck, just think what he could do by investing a full 15% of his income for retirement!

Power Up Your 401(k) With Professional Input

The key to making all this work is trustworthy retirement savings advice. After all, if you're going to make the sacrifice and reduce your paycheck by any amount, you want to make sure you're getting your money's worth, right?

Most 401(k) investors don't realize you can consult your own investing advisor about your 401(k) investments. Your advisor can help you choose the best mutual funds in the bunch and make sure you have a good mix that makes the most of all stock market conditions. Once your 401(k) is cruising along, your advisor can show you the next steps you can take toward a secure retirement.

If you're looking for an advisor to help you with your retirement investing plan, we can put you in touch with an experienced professional in your area who's earned Dave's recommendation for excellent service. Get in touch with your advisor today!