Unlock Your Retirement Savings Potential: The 401k

in Retirement Planning by

There’s no doubt that saving for retirement can seem like herculean task; especially when you’re just starting out. But the good news is that there are many tools available that make your savings process easier – and help you save more.

At the top of the list are employer-sponsored 401k plans and IRAs, both of which offer tax advantaged ways to build your retirement nest egg. But how do you know which of these is best for you? The answer is simple: If you have access to a workplace 401k, start saving there. Then use an IRA to boost your savings even more.

Why You Should Prioritize your 401k

Employer sponsored 401k plans first became available in the late 1970s and by 1982, nearly half of all the large employers offered such a plan or were considering offering one, according to the Employee Benefit Research Institute.

Today 401ks have become a pillar of American retirement savings, constituting $3.6 trillion in assets. As we show in the Daily Capital article, Defined Contribution Plans on the Rise: Action Required, they’ve grown faster over the last five years than any other retirement plan type, including IRAs, pensions and other defined benefit plans.

A 401k provides three primary benefits relative to other retirement accounts:

  • Free money. Most importantly, the vast majority of employers who offer a retirement plan provide some sort of matching contribution. Read on for an example of a typical common match – 50 cents for each dollar the employee contributes, up to 6 percent of their pay – and its impact on an investment portfolio.
  • Higher contribution limits. With a $17,500 contribution limit, you can save significantly more in a 401k than an IRA. There’s also a catch-up contribution of $5,500 per year if you’re over 50.  IRAs have annual contributions caps of $5,500 per year, and $6,500 if you’re over 50.
  • Automatic savings – that stay with you. You can accumulate savings without having to worry about remembering to make deposits – your contributions are deducted before you ever see your paycheck.  And unlike some other workplace plans, you get to keep the assets if you leave the company.

Don’t Leave Money on the Table

Your employer match is essentially free money, and the primary reason you should start saving with your workplace 401k first. Let’s take a look at an example of how that small amount of added saving can make a big difference in the long run.

Caroline is a 30-year-old who makes $100,000 per year and saves 6% of her salary in a 401k that has no employer match.  Let’s assume her salary grows at the rate of inflation.  At that rate, investing with a 6% real return, she’d accumulate $87,000 in her 401k over the course of 10 years.

Now, let’s say Caroline switches companies and her new plan has a 50% 401k match policy.  That totals another 3% of her salary in contributions.  Now, her savings rate jumps to 9% annually and that match garners her an extra $43,000 over the same time period. Over 30 years, the benefit of that employer contribution – combined with the magic of compounded interest – is even more impressive, accounting for $340,000 in additional savings.

Use an IRA to Save More

Once you’ve maxed out your contributions to your workplace 401k, consider saving more for retirement with an IRA. The chart below, which we made for the post Roth IRAs and 401ks: Are They a Smart Move for You?, will help you compare the tax benefits of each IRA with 401k plans.

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Saving for retirement doesn’t have to be intimidating. In fact, your workplace retirement plans not only make beginning to save easy, they may also offer some free money that will jumpstart your efforts.

Take a Look at your 401k with Personal Capital’s Free Software

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Kelly Kearsley

Kelly Kearsley

Kelly Kearsley has been covering business and personal finance issues for more than a decade. Her work has appeared in several publications including WSJ.com and CNNMoney. She loves interviewing new people and sharing advice that helps people better their financial lives.

7 comments

  1. Sam Dogen

    You’ll be amazed how much will accumulate in your 401(k) if you max it out consistently after 10 years. Although I’d much rather have a pension, the 401(k) can certainly help beef up one’s retirement to go along with Social Security if it’s still there.

    Reply
  2. Lorna

    Saved in my 401(k) the maximum for the past five years and have about $105,000. The numbers add up over time for sure!

    Reply
  3. Thomas Rockford

    I have never understood the drive to retire. Why would anyone want to stop being productive? What do retired people do, play checkers and sleep all day? Of course, I have been unemployed most of my life–self-employed–so I have always had to expect to carry my own weight. When one self-employment career begins to stop working, or the government ruins it, get another. Find something you like to do, and do it forever–retirement solved. If you hate your job, you aren’t any good at it anyway.

    Of course, being self-employed is not easy. It requires that you learn to stop expecting a stable economy and guaranteed income, stop expecting the government to protect and “care” for you, become self-reliant, and learn to think for yourself. I will retire when I am too old to walk, and can’t find a motorized wheel-chair. Meanwhile, I want to enjoy the whole party, including being as active as possible.

    When people stop relying on their “investment advisors” and the government, there is no one left but themselves, and then they learn to do things.

    Reply
    • Sam Dogen

      I think in retirement has a new meaning in 2014 now. I retired from my corporate job in 2012 after 13 years to do my own thing online. I’ve always wanted to see if I could make a living as a writer and entrepreneur. It’s been almost two years working on Financial Samurai, and I’m loving it. But I’ve got a lot of free time now, so in my retirement, I’m also consulting with Personal Capital and helping build this site.

      We should strive for retirement b/c it gives us options and different opportunities.

      Reply
  4. Marvin L Norris

    I have been trying to fine the company that is holding my(401K) when I was with the bridge in New Bern NC back in 1995-1999,need the information today if possible

    Reply
  5. Chris Whelan

    You are saving for retirement using a 401k, great start, there is more you need to know to truly retire as you imagine!

    Reply

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