According to the Bureau of Labor Statistics, only about 55% of the American workforce has access to a 401(k) and only about 38% of the total workforce participate. Doing some low level math, that means roughly 31% of those who have access to a 401(k) are not participating. What are people doing with their money?
At a 38% total workforce 401(k) participation rate, no wonder why everybody is worried about retirement. With 31% of workers with access to a 401(k) not participating, this looks a whole lot like self-inflicted pain, which is one reason why the wealth gap continues to increase. Even though I recently wrote about the average 401(k) balance finally breaching $100,000, we've still got a long way to go.
The reason why I've been such an avid 401(k) contributor my entire career is because I knew I didn't want to get in at 5:30am in the morning and leave after 7:30pm for the rest of my life. The only way to extricate myself from a tiring life was to save and save some more. Besides, once your 401(k) is set up, saving becomes easy due to automatic deductions.
Now that I'm out of the work force, I think it's a duty to expound upon the reasons why everybody with access to a tax-advantaged retirement plan should contribute. Once we get the participation rate up, then we can work on increasing the savings amounts. Let's begin.
MENTAL WAYS INDIVIDUALS CAN MOTIVATE THEMSELVES TO SAVE MORE
Personal finance is emotional. So here are several emotional points which I think will help spur you to save more.
1) You will eventually become bitter and angry. Almost every recent college graduate comes out bright-eyed and bushy tailed about their future if they land a job. They all love their jobs (or at least love earning money) and can easily see themselves working for years they say. After the 10 year mark, I've noticed a MASSIVE drop off in enthusiasm. Why? Perhaps during this time a colleague stabs you in the back, you get passed over for a promotion, or you get a much smaller raise than expected. Maybe you're just bored out of your mind after doing the same thing for 10 years in a row.
As a manager in my previous life, trust me when I say that one of an employer's main goals is to give you the least without you leaving. Often times employers mess up this equation, and that's when all hell breaks loose.
Just read the different styles of writing between a millennial blog, a Gen X blog and a 50+ blog and you'll notice a very different outlook on all things. Perhaps you won't actually become bitter and angry, but you will eventually shake your naivete to see the world for what it really is: a cruel, cold, dark, and thankless place (unless you live in San Francisco or Hawaii) where everybody looks after themselves first. The trick is to accumulate enough money so that by the time you face reality, you'll have options.
2) Freedom brings intense joy. The biggest benefit to being financially independent is freedom. Now that I've tasted absolute freedom for the past two years, it's very hard to be forced to go back to work for money anymore. Going back to work for a new experience, a new challenge in a different industry sounds tempting. But going back to work for the main purpose to make more money feels empty.
It's hard to understand what such freedom feels like by simply telling you it's magical. Think about those morning surprises in elementary school when you find out you don't have to go to school due to a snow storm. You end up making waffles and pancakes with your parents who also don't have to go to work. Freedom feels like those mornings you wake up thinking it's a Monday, but it's really still Sunday times 100. Freedom feels like when you've finally found the love of your life – you never want to let go.
3) The government is wasting your money. The more you can protect your money from the government, the more you can prevent greedy politicians from misappropriating funds. If you are against wars, know that the government spent close to $1 trillion of your tax dollars in Iraq, resulting in thousands of casualties. If you are against power hungry politicians, just look up Anthony Weiner, Elliot Spitzer, Rod Blagojevich, Jesse Jackson Jr., Edwin Edwards, Spiro Agnew, Carroll Hubbard, George Ryan, James Traficant, Randy Cunningham, Huey Long, Robert McDonnell, and many more. They will make you sick to your stomach when you learn how much they embezzled and abused their power.
If you're still optimistic that the government is wisely spending your tax dollars, do some research on the number of homeless veterans in America, pension amounts for your city's top officials, income tax burden distribution, the net worth of the 20 wealthiest members of Congress, and how our public school test scores compare to international peers. Ignorance is bliss, which is why such government malfeasance is tolerated. But you aren't ignorant. You are a freedom achieving machine who understands that money is just a tool to achieve your objectives.
4) Prove your doubters wrong. How many people went through high school picked on by bullies? How many times have people doubted your abilities, told you you weren't good enough, or said you'd never amount to anything? I've experienced a ton of hate and doubt growing up overseas as a foreigner, as a minority going to college in the South, as a blogger, and as an aging athlete. Every single negative incident motivates me to try harder. Without hate and doubt, I seriously believe life would be too easy for the average person in this country. We should embrace our skeptics with love.
The great thing about money is that it's largely blind to who we are. Anybody can make money, which is why money is such a large focus for many immigrants who come to America. Many of the immigrant families I've spoken to focus on two things when they arrive: 1) getting as much education as possible, and 2) trying to accumulate as much wealth as possible. I'm sure these two things are important to many other Americans as well. By having enough money, nobody can ever oppress you again.
I can say from first hand experience that insults from financially insecure people more easily roll off my back now that I'm financial independent. I just feel bad for them. In the past when I didn't have a large enough financial nut to quit my job, I was much more boisterous in fighting back given I'd get annoyed. (See How To Get The Haters To Stop Hating You)
WAYS EMPLOYERS CAN INCREASE PARTICIPATION RATES
Now that we know the government can't be relied on to encourage people to save given they can't manage their own finances, the employer is the only logical solution to increase our retirement savings participation rates. Here are some suggestions:
1) Host a mandatory retirement seminar for new employees. Educating employees in the very beginning is the most effective way to get them to start saving given they are so excited to do whatever you tell them to do. In addition to educating all new employees about the firm's retirement benefits, host mandatory retirement benefits seminars every year for existing employees. It's incredible how few employees read their employee handbooks. If more employees did, I bet a higher number of workers would feel greater job appreciation thanks to understanding all of their benefits in detail.
Thanks to reading my employee handbook, I realized that my employer would pay for my part-time MBA if I agreed to stay for at least two years after graduating. I happily applied and my employer footed the $80,000 bill. I also learned about my employer's sabbatical policy, which stated that one can take a one-to-three month sabbatical after five consecutive years of employment. Unfortunately, I did not take advantage of such a benefit because very few people took sabbaticals.
2) Provide as many low cost investment options as possible. One of the biggest push backs for not participating in a 401(k) is high management fees. The other big complaint is a lack of mutual fund options. There needs to be a diverse offering of low cost mutual funds from the likes of Vanguard and other low cost fund providers. I rolled over my 401(k) into an IRA mainly for these two reasons.
My old 401(k) provider was Fidelity Investments. As a result, we naturally had many Fidelity Investment funds to choose from in our 401(k). Fidelity is an excellent financial services company, but some of their portfolio fees were egregious. For example, I was paying a 1.6% annual fee to invest in a Fidelity Tech Fund. I had no idea until I ran my portfolios through Personal Capital's 401k Fee Analyzer. (See: How To Reduce Your 401(k) Fees Through Portfolio Analysis).
3) Incentivize mandatory participation. The easiest way to incentivize employees to save is to make it crystal clear in an e-mail or in a seminar the employer 401(k) match policy. We had one fella come around to speak to us once a year about how he accumulated millions in his 401(k) thanks to our company's employee match and profit sharing program. It was a little obnoxious, but I'm sure it motivated younger employees to start maxing out their 401(k)s.
At places like McKinsey Consulting, a portion of one's paycheck automatically gets funneled to a tax-free retirement plan because they know its wise to train their younger employees to start saving early. The federal government opened the door to allow employers to automatically enroll employees in 401(k)s eight years ago, with the Pension Protection Act. Unfortunately, there's only about a 3% participation rate.
In Australia and Singapore, a portion of each paycheck also gets saved in a retirement savings plan called the Superannuation Fund and the Central Provident Fund. These two countries have the largest inheritance amounts per individual in the world as a result. If employers can be upfront in highlighting their employee match policy and provide charts as to how much one will have after saving for XYZ number of years, more people will save.
THE IRONY OF THE 401(k) PLAN
The biggest irony about the 401(k) is that employers are not incentivized to get their employees to participate because employers want their employees to work for as long as possible. Once an employee has enough money, there's an increased flight risk as she realizes she's no longer beholden to a job. The Affordable Care Act is one of those government policies that emancipates many low-to-average income workers from bad job situations to do something more meaningful with their lives as well.
As a small business owner myself, all I see are many new taxes I've got to pay that I never had to pay before as an employee. It costs money for an employer to administer a 401(k) plan. Such costs are usually passed along to participating employees. And given the abysmal loyalty of employees nowadays, employers are more reluctant to offer generous retirement packages.
Part of the reason why I appreciated my last employer so much was because they not only provided a 401(k) match up to $3,000, they also gave employees profit sharing contributions. When I was thinking of leaving my job, I had to think a little harder because I'd give up $25,000 a year in total employer retirement contributions. In the end, I decided to take the leap because if I didn't, I never would.
A great retirement benefits plan is an excellent way to attract the most talented, and most loyal people. Employers need to do more to make clear their benefits when hiring. Meanwhile, employees must get educated about what the employer has to offer and make 401(k) contributions a priority if they don't want to end up bitter, angry, and poor (point #1). Please make an effort to contact your benefits administrator immediately.
Updated 401(k) Savings Guide By Age For 2019 And Beyond
To give you some motivation through a visualization of what you could have once you start participating in a 401(k), please take a good look at the chart below. For 2019, you can now contribute a maximum of $19,000 a year as an employee to your 401(k).
The low end assumes a consistent maximum contribution of $18,000 after the first year contribution of $8,000 with zero company match and zero growth. The high end column assumes a consistent maximum contribution of $18,000 plus a 5%-10% annual rate of return with zero company match.
Now imagine how much more people can save once a match and profit sharing contribution kicks in. Save early and save often people! The longer you can stay at an employer that provides profit sharing, the better.
WEALTH BUILDING RECOMMENDATION
Manage your money in one place for free: Run your 401k through Personal Capitals' free 401k Fee Analyzer. The online program will quickly show you how much you're paying in portfolio fees a year. The tool highlighted $1,700 a year in fees I had no idea I was paying. I ended up switching out of a fund with a 1.6% expense ratio into a 0.2% expense ratio Vanguard fund with similar attributes as a result.
They've also come out with their incredible Retirement Planning Calculator that uses your linked accounts to run a Monte Carlo simulation to figure out your financial future. You can input various income and expense variables to see the outcomes.
Updated for 2019 and beyond.
Great information as usual Sam! I pass along your info to friends, family and my grandkids. Thanks to my employer’s 401k program, I was able to retire early and am living the dream. My advice to all the youngins in my life is to live simple and save your money.
Thanks for sharing my site to your family Margaret and congrats on retiring early!
Sam, how do you feel about financial gurus telling people to stop contributing to 401K funds due to paying off debt as quickly as possible. I know a financial guru who has a big following of 10 million people, that can sway contributionn numbers slighlty. He suggests to stop it for two years while you pay off debt, then starting it once debt free up to 15%. In the debt repayment case, are those people right in stoping 401K contributions?
You know the sad thing about all of this Sam? I honestly believe we are about to see an epidemic of retirees out on the street in the coming decades. I believe it will be so bad that politicians will base their entire platforms on providing government programs for the elderly. But the truth is in the numbers and as you pointed out individuals are not securing their retirement during the years where they have active income. People are living for today and not the future, but when America sees the elderly out on the street they will want the government to run to the rescue when in fact it was their own doing.
Just my two cents.
Thanks for sharing these stats Sam. I think those rates are even lower up here in Canada. I hope it means people are saving other ways, other than with their employer. Hopefully. We all need to save for retirement if we want to stop working some day.
I can’t believe that people wouldn’t participate in a 401k! Don’t expect the government to support you!
I’m kinda lucky, my retirement options are much bigger than most, simply because I live in Australia. We have a mandatory system called superannuation that all employers/employees have to participate in.
Gives me a greater chance to retire a millionaire simply because I HAVE to fund my own retirement.
I am on the low side for my age even though I have been maximizing my contributions for several years. I did take a few years off for graduate school so that explains some of it. But I forgot to include my rollover IRA fund which was from previous 401k contributions. When added in, I’m actually doing better than originally thought.
Cool. Folks should definitely add any rollovers and other retirement savings and compare such amounts to my chart. What did you study in grad school and what are you doing now?
My first job out of college matched the 401K 100% up to 6% but I was not educated on the subject yet. I completely agree that education is critical to more people consistently contributing. I am much wiser now but my current employer matches far less. In July we are switching 401K providers from Metlife to Fidelity so that will be a good opportunity to find the lowest fee options available.
I am in favor of automatic enrollment! If this were required of all employees for even as little as $5, it will increase participation. As soon as you start a 401K you are more apt to increase your participation.
I have never worked a job that I had a 401k offered. I did spend 8 years in the military, we had the TSP which is the 401k basically. But at the time I did not know about it even, nor did I have interest in investing. At one point I did open a Roth with Bofa, but I was put into some horrible funds that underperformed the US Market(s&p). My mistake was not being proactive and doing my research. So eventually I did my research and now I’m with vanguard and sticking with low cost index funds. My current job still does not offer a 401k, so I been maxing my IRA and investing the rest into my taxable account with vanguard. I like to keep it simple! Some times it’s hard just keeping it simple even.
Sam,
I offer a sep ira to all my employees who have worked for me a minimum of 3 years. For the last 10 years I have given them all 7% of there gross annual salaries. Free Money! I also pay a fee only broker to come to our business every year and give them impartial advice on where to put there money. Out of the 16 employees who qualified, 4 cash out there contribution as soon as it hits the brokerage firm. 10% penalty plus taxes. Half the employees keep the money in a money market because they are afraid of the stock market. I even had 1 employee who asked me if I would talk to our broker. It seems her last years contribution sat in the money market all year when she wanted it in something else. I asked her how she didn’t realize it was still in the money market when we get a statement every month. She said she only looks at the total value, not where it is.
My point is even though I give free money, pay for someone to help them, half the people cant be bothered.
By the way, we have weekly Nascar and NFL pools at work. they’ll spend 20 minutes a week researching there picks, but wont spend more than 10 minutes a year on there IRA.
Thanks for educating,
Bill
Amazing insight Bill! You seem to be doing everything you can to help them out, yet the “yield” doesn’t seem that great. I wonder if you highlight the chart in my post and tell them this is what they COULD have, whether more people would get on board?
Gotta love them sports pools! I guess the secret is: people will always prefer the fun and easy route.
I think 401(k) tax incentives will erode over the next decade, double taxation especially for a more affluent side of populace but in reality effecting all. There are already proposed tax caps in budget talks for 2015.
My company matches 100% up to 3% and makes a 5.5% yearly contribution. (They used to match 100% up to 6% and we used to have a pension).
What really makes me mad though, is my employer consistently fails the IRS test for qualified plans so they cap our contributions off at 10% for all employees who are HCEs (highly compensated emplyees). An HCE is defined as anyone making over $115K for 2013. Sometimes I make over that amount based on bonuses and overtime. What makes it worse is that the 10% contribution comes out of my base salary (not bonus or overtime). So I end up only being able to contribute around $10K a year. I want to max out my 401K but can’t. What can I do?
They gave free donuts and people still did not attend – that’s the differnce between Canadian’s and American’s!
Free donuts and American’s will definately show up! Will they then sign up – not as definate!
Seriously though it is sad that people do not sign up and do not put in AT LEAST the amount that will get them the full company match.
I see you updated your BLS stats at the top of the post — I hope the feedback I provided was helpful!
Your post made me think and I expanded on this topic on my own blog this evening. As the owner of a small business, I can give a perspective on why more companies don’t offer 401(k) plans — the access side of the equation instead of the participation side. I won’t include a link to the post here in case that will catch my comment in a spam filter, but it’s the first one up if you click through.
Thanks for all of the great content and commentary!
Great catch and I think you are right, hence the upgrade. Still, a 38% total workforce participation rate is really alarming, because you know the other 62% probably aren’t saving as much. Thanks for your contribution!
Sam,
With savings rates like that, government debt levels, and the way our country is leaning left is there any doubt what disciplined people save now will be raided to pay for the rest? After all its becoming the American way…
I think there is a lot of doubt about that happening – I think the chances of it happening are close to 0%.
However, 401K withdrawals are taxed at earned income rates – are these rates likely to go up – almost certainly.
A wealth distribution from those who’ve saved to those who haven’t saved is definitely a possibility. Getting a Hail Mary bailout is definitely something I’m sure many people are hoping for.
MK,
We should use our fear of that happening as motivation to spread the “gospel” about saving early and often. The more people that are accumulating wealth, the more support there will be for legislation that doesn’t take that diligently earned wealth away from us.
I feel like Dave Ramsey is on the front lines of this, with his effort to get people achieving and living with a positive balance sheet, net worth.
Last week I stumbled across a paycheck deduction calculator that clearly illustrates how the attempt max out 401k contributions will impact your take home pay. Not only does it show how little impact small percentage changes to your contribution rate impact your paycheck but also how to plan to live within your net pay after a maxed out contribution.
https://www.bankrate.com/calculators/tax-planning/payroll-tax-deductions-calculator.aspx
Some of the best financial advice I ever got was day one of work at my second employer. A managing partner asked me how much I was going to contribute to my 401k, and I said up to the company match which was 6%. At the time I was relatively junior and he knew the 6% didn’t equate to maxing out the 401k. He looked me straight in the eye and said I was dumber than he had originally thought and walked away. He later took me aside and explained why by all means possible I should work to max out the 401k, I have done it to this day, other than a two year hiatus when I worked overseas. Thanks to that advice and assuming the government doesnt steal my money I am confident I can live a nice retirement. It may not be skiing in courchevel and gambling in Monte Carlo, but I think many would be suprised how far their money can go in the U.S. you don’t need to make genius decisions, just don’t live beyond your means, contribute to 401k, drive reasonable cars (that maybe cost even a little more than 10% of annual income) and shoot to pay off your house or a property faster than 30 years and you should be in good shape.
“He looked me straight in the eye and said I was dumber than he had originally thought and walked away. ”
Wow, that is the TOUGH LOVE I like to hear! I’ve been toying with more tough love type of posts with, “Maybe It’s Your Fault Why The Wealth Gap Continues To Widen” in order to really drive home a point for people to make better choices, but I feel bad.
https://www.financialsamurai.com/wealth-gap-widens-because-of-your-own-doing/
It’s hard to believe people don’t max out their 401k. I’ve maxed mine out every year since graduating and still feel stressed that I won’t have enough money in retirement. The stress of an underfunded retirement account is far worse in my opinion than having less spending money today. I do identify with people who want to retire early, but to me that means you need save more in addition to, rather than in lieu of, contributing the maximum amount to a 401k. Also, that chart doesn’t frustrating for those of us who spend much of our 20s in higher education.
You are acting totally rational, which is good. The stress of a underfunded retirement feels worse than the act of saving now. That is the better way to feel than to YOLO your life now and end up with much less.
With each dollar you contribute, hopefully you will feel less stressed.
Are you sure you’re only assuming 5-10% interest and 0 matching by employer for high end? $38k after 2 years means a growth of $3k on a principal of $17.5k after one year, which is 17.1%.
Ditto for $65k after 3 years… subtract the 38k from 2 years and and the 17.5k from contributions, and that’s a gain of 9.5k on 38k, or 25% CAGR. That’s much better than I can consistently get playing the stock market :/
Good question Dave. It depends on timing of contribution. Say you gain 0% after the first $17,500 and 10% on your total the day after you contribute another $17,500. That $35,000 becomes $38,500.
One can obviously front load their contribution or space it out over time. I wouldn’t get too nitty gritty into the weeds as the chart is meant as a guide. I don’t assume any company match either to err on the conservative side.
Hey Dave,
I think your math is a bit off.
After two years, in the high estimate you’d have principal of $35,000 (two years of $17,500 contributions), so a total balance of $38,000 would require a max gain rate of ~8%.
The math on the three year high estimate proves your point a bit better (the principal would only be $52,500), but only if you assume the earnings aren’t being compounded. If you were to do a CAGR calculation that accounted not just for a growth rate off the balance but accounted for the new principal each year I think you’d see that rate drop down closer to 10%.
Regardless, it’s a good reminder that the low estimate is all anyone (who’s 22 today) can influence, control, and achieve.
And to put things in perspective I’ll share the fact that it’ll cost about $219,000 for a couple to eat in retirement, just eat. That assumes $5 per meal, per person, 3 times a day, 365 days a year for 20 years.
Jeff
Hey Dave,
On the two year example, I think you’re forgetting that there were two years of contributions. The principal is $35,000 after two years, so $38,000 account balance would require ~8% of investment gains.
I’ve only worked non-profit so 403(B) for me, but I’m still having difficulty signing up for my 403(b) even after being here a while because they don’t do meetings about it and we don’t have a true HR person… it’s bizarre.
A lot of non-profits don’t do matching but even if it’s a small amount, it incentives employees to stay and contribute to retirement.
I greatly enjoy your articles Sam and do contribute to my employer’s 401k plan. I’m quite concerned, however, about the spectre of forced Treasury allocations/ outright theft of a 15 trillion dollar low hanging fruit for a bankrupt government. .gov is populated by sociopaths and liars who will prolong the decay by any means necessary.
Do you have thoughts on this possibility? Its nothing anyone can control but also being liquid enough and under the radar if you fear such a takeover has its merits.
Ty – It’s definitely possible the government could decide to rip us off by charging us an Exit tax on our 401k funds or keep them altogether. This is why we should write our 401ks off mentally, and continued to save beyond these vehicles. If the 401k is there for us during withdrawal time, then great. IF not, then we can start a mutiny and at least we have other funds.
There are times I look at my 401(k) balance and think that I’m not saving enough. While that’s certainly a possibility, it does take a little of the sting away when I realize that even though I think of myself as behind, I am so much further ahead than the average American. Those are some scary numbers!
True, although comparing oneself to bad stuff ain’t that good.
The two most common reasons I’ve heard from people as to why they don’t contribute are: A) they’re intimidated and assume they don’t know how to invest the money if they were to contribute and B) they insist that they can’t afford to because they “need the money now”
The past two companies I’ve worked for automatically enroll you into the 401k plan (albeit at a TINY percentage of income) and make you opt out if you wish not to contribute. I think that’s a good way to increase participation, but more really needs to be done than auto enrolling what amounts to a token contribution.
Intimidation.. that’s a good point. So employers should provide various options on how employees can invest their money based on their risk profile.
When you make a ton of money it’s easy to preach about contributing the maximum $17,500 per year to your 401k. But, when you’re only making 40k that contribution is more than half your after tax pay. Not exactly doable at that salary, and the ACA will be yet another tax that you’ll be required to pay whether you want or need health insurance at all. The gov’t is full of greedy bastards.
Good thing the 401k is pre tax contribution and singles or couples making $40,000 get subsidized for ACA.
As you said, Sam’s suggestion to max 401k while earning $40k is pretty nuts. But keep in mind that it completely depends upon where you are in your life’s journey.
I’m working to bump my 401k up to the max, while holding a 15 year mortgage, 4 kids, and a stay-at-home wife. I literally increased it up to the max recently and will hopefully be able to adjust payments and lower expenses to keep it at that level.
I doubt very much that it’s going to be easy at all (not to mention cramping some of my current lifestyle), but it is all for my own future self.
Keep in mind that Sam suggesting you max it out isn’t to say that you are dumb or lazy if you don’t, but I can’t tell you how much better it feels to be growing my retirement savings account faster and faster every month and every year!
And FYI, my 22 year old nephew keeps telling me how tough it seems to save (even though my nagging him has managed to get him to put some money away), all the while deciding to lease a sharp looking new truck that costs $500/month at least … which he can afford while living at home with mom and dad. He could have easily funded a Roth IRA which I was pushing him to do. But ce la vie.
“And FYI, my 22 year old nephew keeps telling me how tough it seems to save (even though my nagging him has managed to get him to put some money away), all the while deciding to lease a sharp looking new truck that costs $500/month at least … which he can afford while living at home with mom and dad. He could have easily funded a Roth IRA which I was pushing him to do. But ce la vie. -”
Love it! The American dream and dilemma at its finest.
All we have to do is to make it cool not to own a car.
It’s not too bad if you don’t have kids. My first job out of college paid $36k, and I’ve been maxing out on retirement contributions since day 1. You just have to pretend you make a lot less and figure out how to make the budget work. Looking back, I’m so glad that was my mentality from day 1.
It’s kind of interesting, here in Cayman it is required by the government after 6 months of continuous work with one employer, you have to contribute 5% of your salary to their version of a 401(k), with your employer matching your savings 1:1.
When I was contributing to a 401(k) back in the US, my old employer used Merrill Lynch. When I switched my accounts to IRA’s and did a little more research, I quickly realized they had sold me on funds that were charging pretty high annual fees (~1.25%). So I switched the accounts to self-directed funds to be able to purchase vanguard indexes with much lower fees.
Man, I’d love to really learn more about life in Cayman and the banking industry. I have to imagine there must be so much wealth and funny stuff going on there!