It comes down to participating in a plan and selecting cheap funds

President Trump has made it clear that he wants no change to the tax advantages of 401(k) and similar retirement accounts, ending an uproar from certain parts of the country.

What got lost in the news was that many Americans don’t even fully exploit their 401(k) plans in the first place.

So we can use this moment in time as a nudge: How can we get the most out of our employer-sponsored retirement plans? The answer is simple: Participate and allocate.

To prepare for the New Year last January, I wrote the following article: This long-term investment leads to a guaranteed 100% return on Day 1. It described the problem of millions of Americans who leave money on the table by failing to participate in employer-sponsored retirement plans. It also made clear just how lucrative the plans can be for people who can remain committed to them over the course of their careers.

Access to plans and participating in them

A major problem is that many American workers have no access to tax-deferred employer-sponsored retirement-savings plans. According to the Pew Charitable Trusts, U.S. Census data indicate that “over one-third of all workers do not have access to either a defined-benefit or defined-contribution plan sponsored by their employers.”

But that also means two-thirds of full-time workers do have access. Forty-four percent of part-time workers have access to plans.

So a lot of people have access. The next question is: Are you participating? If not, why not? Many employers make matching contributions. Those vary, but let’s consider a modest match of 3%. If you contribute 3% in pre-tax money each pay period to your 401(k) or similar account, your employer kicks in another 3%. This explains the “guaranteed 100% return on Day 1” referenced in my earlier article.

What if you think you can’t afford to make matching contributions? Maybe you can sacrifice elsewhere to make it possible. When we choose sample numbers for discussion, a reader’s first reaction may be that they are too high or too low, but that’s not the point. You can use your calculator and work out more appropriate numbers.

Let’s say your salary is $50,000 a year, your employer offers a 3% matching contribution and you are just starting a career. For you to take full advantage of your employer’s generosity, you need to contribute $1,500 a year to the 401(k) account. That’s $125 a month. Can you afford that? If not, what can you sacrifice in order to do so? You can refrain from buying new cars, eating out frequently and purchasing full-boat cable TV.

To proceed with our example, maybe as your career progresses you are getting 3% annual raises. Great — keep 2% and increase the 401(k) contribution by 1% of your salary each year. This hopefully keeps the annual increase from being too painful. As the years go by, with promotions or a few hops from company to company (which seems necessary for younger workers, as employers tend to value their new hires over their loyal, productive employees), your salary may increase significantly. If you keep increasing your 401(k) contributions by 1% of your salary per year, you will eventually max them out. The current annual limit is $18,000, and it will rise to $18,500 in 2018.

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