A new research report from Schwab Retirement Plan Services highlights the dangers that debt and overspending pose for retirement savings. In a recent survey of roughly 1,000 workers with access to a 401(k) plan, only half of the respondents believed they were contributing to the 401(k) plan. I say believed, because it is possible that those who do not think they are contributing could, in fact, have been automatically enrolled or have been receiving non-elective employer contributions. However, for those who were not saving, the main reason appeared to be because they have no money left over each month, or they are already behind on bills. Those who were not saving were twice as likely as the savers to be delinquent on bills, or to report they were just barely meeting their current financial needs. The stress of daily requirements, bills, taxes, and debt are holding many Americans back from properly saving for a financially secure retirement.
When non-savers were asked about the primary obstacles to their saving for retirement, the top two obstacles noted were credit card debt and regular monthly bills. However, when savers were asked the same question, unexpected expenses topped the list of obstacles, not monthly bills or credit card debt. For savers, only 29 percent of respondents stated that unanticipated expenses posed a hurdle to saving, as opposed to 42 percent of non-savers. Those saving for retirement appear to be exhibiting better financial behavior across the board, by managing to live within their means and through less reliance on debt to fund their lifestyles. These findings could be partially explained by differences in income, a factor that was not taken into account in the Schwab study. The unfortunate outcome remains the same. Those who are not saving for retirement are being saddled with credit card debt, are unable to save, and are not finding a way to live within their means. This vicious cycle creates financial unease and increasing concerns about their future financial security.
Because most 401(k) plans offer some kind of employer matching contribution, it really is in the best interest of employees to contribute enough to the plan in order to receive the full employer match. For example, an employer might offer a 100 percent match on the first 3 percent an employee contributes, and a 50 percent match on the next 3 percent. So, if you are making $50,000 a year, you are going to need to contribute 6 percent of your salary a year, or $3,000, to receive the full employer match. Most employees should consider doing this. By not contributing enough to get the full match, employees are leaving what is essentially free money on the table. But remember, if you save $3,000, get the full match of $1,500 in that case, you have now put away $4,500 and perhaps only reduced your after-tax income for the year by about $2,550 (assuming an effective tax bracket of 15 percent).
But, is just saving the minimum amount to get the 401(k) employer match enough? Probably not. A good general rule of thumb is that employees should be saving at least 10 percent of their salary each year for retirement. However, this really depends on a variety of factors, including the age at which regular saving started, the aggressiveness of the investments chosen, and the number of years one plans to remain in the workforce before retirement. If you do not start saving until your 40s, you might need to save closer to 20 percent a year in order to retire with a financially secure nest egg in place.