Unfortunately, things didn’t go quite as planned. Let’s look at the state of the 401(k) and look at some of the ways that you can boost your savings!
The Current State of the 401(k)
Despite the 401(k) having a reasonably generous upper limit at $19,500 for 2021, most employees don’t contribute anywhere near the maximum. The average savings rate was 6.9% for employee contributions. Including employer contributions, the overall savings rate jumps to 10.6%.
That’s a relatively reasonable rate. However, when you consider that the average household income was $56,516 in 2015, that means that the average person is putting in about $6,000 a year.
This savings rate is evident in the average 401(k) balances by age.
- Ages 22-25: $4,236
- Ages 25-34: $21,970
- Ages 35-44: $61,238
- Ages 45-54: $115,497
- Ages 55-64: $171,623
The 4% rule of retirement spending says that you withdraw 4% of your savings at retirement for the first year and an inflation-adjusted 4% each subsequent year. Following that rule, the average American would have $6,864.92 during their first year of not working ($572 per month).
That’s certainly not enough to have a comfortable retirement!
What Can You Do To Boost Your 401(k) Savings Balances?
There are two ways to boost your 401(k) account balances. The first is to find a way to boost your contribution rate, while the second (and sometimes forgotten way) is to increase your returns from your investments.
Many articles exist on how to increase your contribution rate. If you’re not already contributing the maximum, you’d need to find ways to reduce expenses so you can allocate some more of your pre-tax dollars towards your 401(k). Perhaps that’s eating out a little less or reducing your mortgage or rent payments. There are many ways to improve your contribution rate and get you closer to the maximum.
However, for individuals who are already contributing the maximum, there’s nothing else to do but boost your investment returns (really, regardless of how much you’re contributing, you should maximize returns)!
The investment choices you make can have a substantial impact on your retirement bottom line. Consider two portfolios. Each contributes $5,000 per year for 30 years. The first conservative portfolio earns 2% per year while the second more aggressive one gets 4%. At 2%, the first portfolio has $195,224 in it. Not bad. However, the second portfolio has $258,223!
At an 8% return rate, that figure grows to $471,137!
Focusing on increasing your investment returns can have a substantial impact on your ability to retire comfortably.
How To Improve Your Investment Return Rate
There are no guarantees when investing as the adage that past performance does not guarantee future results always applies. However, typical 401(k) plans don’t make investing as easy as they should. Your investment choices are often restricted, so buying some of the hottest growth stocks (like Amazon, for example) is an impossibility in 401(k)s.
What you should know, though, is that when you leave an employer, that money is yours to take. You don’t need to keep it in your old employer’s limited 401(k) plan. You can roll it over to your current 401(k), or you can roll it over to an IRA. If you choose to roll it over to an IRA, then you can invest in anything you want – mutual funds, stocks, or anything else permitted in an IRA (even gold). With that flexibility, you and your financial planner can work to create a comprehensive retirement strategy that maximizes growth potential.
If you have a more restrictive 401(k) with your current employer, see if they offer a service that lets you put your 401(k) in a brokerage account. For example, Fidelity offers BrokerageLink that your employer may support. If they do, then you can put your current 401(k) money in there and trade on the market (ETFs, stocks, and so forth).
Be Mindful of Your 401(k) Milestones
Experts say you need 1x your salary saved by age 30, 3x by 40, 6x by 50, and 8x by 60. If you’re not on track to meet that, consider working with a financial planner to see what options you may have to maximize your retirement savings and provide you with golden years of comfort! Contact our financial advisor today for a free consultation.
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