Why Aren’t You Participating in Your Employer-Sponsored Retirement Plan?
When it comes to retirement planning, here are some startling facts:
The average retired household spends about 3,800 a month. The average monthly Social Security benefit for 2021 is $1,543. That’s obviously not enough to pay for retirement on its own. Especially considering that, according to the Department of Labor (DOL), the average American spends roughly 20 years in retirement.
Here’s another frightening set of statistics:
The same DOL report shows that in 2018, almost 30 percent of private industry workers with access to a defined contribution plan, such as a 401(k), did not participate. In fact, the DOL found that only about 40 percent of Americans have even calculated how much money they’ll need to save for retirement.
How can you work toward a goal if you don’t even know what the goal is?
And why, if you know Social Security won’t likely be enough to fund your retirement, and you are eligible to take advantage of an employer-sponsored plan to help make up the difference, would you not participate?
As a financial advisor in Annapolis, MD, this equation is mind-boggling.
At Scarborough Capital Management, one of our specialties is 401(k) plan management. These plans were created to help compliment what you’ll get in Social Security benefits. The key here is you have to save and invest money during your working years to fund your retirement years.
By not taking advantage of your employer-sponsored plan, not only are you missing out on the opportunity to save for your future, but you’re also passing on your employer’s willingness to match your contributions up to certain amount, if applicable. That’s basically free money.
At Scarborough Capital Management, we’ve heard a lot of reasons for why you wouldn’t take advantage of your employer-sponsored retirement plan – but few are good ones!
Why People Don’t Participate?
When asking someone why they don’t participate in their company-sponsored retirement plan, a common response is, “I need the money now,” or, “Retirement is so far away; I’ll do it later.”
Unfortunately, we often see that “later” never happens.
Some people think they don’t need a 401(k). Maybe they’re counting on receiving a pension, or they expect their spouse or an inheritance to fund their retirement.
Others believe they can’t afford to contribute to a 401(k), but often times, if they really examined their budgets, they likely could.
Many people have debts they’re focused on reducing, like medical bills or student loans, and any extra income is directed there.
Others simply don’t understand how a 401(k) works and therefore, what they’re missing out on.
The truth is, you really can’t afford not to contribute to a 401(k) if one is available to you. Even if you’re only able to contribute a small amount now, it’s something, and you can always adjust your contribution amount in the future when your financial situation improves.
Drawbacks of Not Participating
Aside from the most obvious reason, which is not having enough money in retirement – or worse, not having enough money to even retire in the first place – failing to participate in a 401(k) can hurt you in many ways.
- Increased Taxable Income: Not contributing pre-tax dollars to a retirement savings plan can mean a higher adjusted gross income, which is the amount you’re taxed on during your working years.
- Loss of Investment Potential: Let’s say you would have contributed $20,000. Even if you didn’t contribute another dollar, in 30 years, assuming an 8 percent return, your $20,000 would have become more than $201,000. Every dollar you don’t invest reduces your compounding power.
- Time: The longer you go without funding your retirement, the harder it can be to save enough. The amount you’ll have to save every year increases for every year you don’t contribute.
Benefits of Participating
By participating in your company-sponsored 401(k), you can benefit from:
- Employer Matching: Does your company offer a corporate matching program? If so, find out how to take full advantage. Know the maximum percentage your employer will match, and if you can, contribute at least that much. Be aware of any contribution level tiers, if they exist. Does your employer match 100 percent of your contribution or 50 percent? An employer match can effectively double your savings and investing power, and to not take advantage is basically leaving money on the table.
- Taxes: Money you contribute to a Traditional 401(k) comes out of your paycheck before taxes are calculated, which lowers your taxable income for the current year. In addition, the earnings in a 401(k) account are not subject to income taxes until you begin making withdrawals. This benefit is compounded if you’re in a lower tax bracket when you make the withdrawals (when you’re retired) than when you made the contributions (when you were working).
- Saving on Auto-Pilot: With 401(k) contributions being redirected from your income before you get a paycheck, you’ve automated the retirement savings process. Even better, after a few weeks or months, you’re likely to have adjusted to the new amount of your income, and many people don’t even miss the amount they’re contributing anymore. Remember though that retirement planning isn’t a once-and-done, set-it-and-forget-it kind of thing. You’ll still want to review your 401(k) to make sure your savings goals are on track and determine whether you can afford to save a little more aggressively, especially as you get closer to retirement age. Read our recent blog post: When is it Time for a Financial Review?
If you haven’t consistently been contributing to a 401(k), let’s talk. Making a commitment now to start setting money aside can be the difference between a comfortable retirement and one where you have to work longer than expected or change your lifestyle. At Scarborough Capital Management, retirement planning and 401(k) plan management are our specialties. Start a conversation and see how we can help.