Saving for Retirement: The Importance of Having a 401(k)

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According to a recent survey conducted by Marcus, 62% of Americans have not established or set up a 401(k) with their current employer.

Surprised?

Perhaps even more surprising is what you could be missing by not contributing to your 401(k).

Quick refresher: a 401(k) is a retirement plan offered by employers where you can contribute a portion of pre-tax dollars from your paycheck. With regular contributions, it can be a powerful retirement savings tool for many.

So let's run the numbers. The chart below represents an average rate of return 8.8%, which is the historical annual return for portfolios comprised of 60% stocks and 40% bonds.

Note: this is just a hypothetical. Your actual portfolio may look different, and the portfolio allocation will likely change over time. Also of note: this example assumes that your money stays invested in your account the entire time, and that a pay period is twice a month.

How much you could be missing out on by not contributing to your 401(k)

The numbers may seem eye-popping.

But what if your company offers a 401(k) match? You could be missing out on even more.

A 401(k) match simply means that for every contribution you make up to a certain point, your employer will also contribute some amount.

Assuming the same contribution amounts above, here’s what you could be getting from an employer that offers a dollar for dollar match, up to 4% of your salary. For this example, we used $80,000 as the fixed annual salary, not accounting for any raises.

With employer 401(k) match

The importance of saving for retirement

Given these numbers, how can it still be so hard to save for retirement? Probably because after all of the other obligations we’re expected to juggle – financial and otherwise – saving for the future can feel overwhelming. And while it’s certainly easier said than done, the numbers above should illustrate why saving for retirement should be a top priority for all of us.

Think about all of your financial obligations, nail down your budget, and figure out ways you can save. Even contributing just small amounts can go a long way, thanks to the power of compound interest (which essentially allows you to make money on your money). You can always start small and slowly ramp up your contributions.

Above all else, regularly contributing to your 401(k) could really add up – to hundreds of thousands, and in some cases millions – over the long run.

How to contribute to your 401(k)

Wondering how to set up and start saving in a 401(k)? Start by getting in touch with your employer’s HR department.

Then, set up your plan so that you’re making automatic contributions from each paycheck. This way, you’re paying yourself first and aren’t tempted to spend what you can otherwise save. 

Find out if your company offers an employer match. If your company offers this (congrats on the free money!), you probably want to make sure that you’re contributing at least enough of your own paycheck to take advantage of the match.

No 401(k) at work? Consider an IRA

If your employer doesn’t offer a 401(k) or you work for yourself, consider a Traditional or Roth IRA, which allow you to contribute to your retirement savings.

Here’s a quick rundown on both: Traditional and Roth IRAs offer tax advantages and the contribution limits for each in 2019 are $6,000. When you contribute to a Traditional IRA, your contributions may be tax-deductible, and your money grows tax-deferred until you withdraw it in retirement. When you contribute to a Roth IRA, your contributions are made with after-tax dollars, but your withdrawals in retirement are tax-free.

Do some research on the tax advantages and eligibility requirements for both to figure out what’s right for you.

Already contributing to your 401(k) but wondering if you could be doing more to save for retirement? In some cases, you might be able to open an IRA in addition to having a 401(k).

When to start saving for retirement? There’s no time like the present  

Whatever your situation, make sure you’ve got a retirement savings plan in place. If getting started is the thing that’s stopping you, take a look at those numbers again for motivation.

Like going to the gym, often times once you take the first step, the rest is easy (or at least, easier). By setting up your 401(k) and enrolling in automatic contributions, you’ll be surprised at how easy it can be to save.

So now: go talk to your employer about setting up your 401(k). Then, start regularly contributing to it. With enough time and regular contributions, those numbers above might not seem so out of reach. 

This article is for informational purposes only and is not a substitute for individualized professional advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.

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