Under-Saving on Retirement Will Cost Millennials
Not saving enough for a 401(k) match leaves thousands of dollars on the table and hurts financial health
I’m a huge proponent of “real-life” college classes that prepare you for doing your taxes, choosing the right stock or planning for retirement. Otherwise, many millennials are just tossed into the mix and try to complete these “real-life” tasks with their fingers crossed.
Whether it’s not understanding how it works or wanting every penny of our check for now instead of later, millennials simply aren’t saving enough to take advantage of companies’ 401(k) match, "potentially leaving thousands of dollars on the table and negatively impacting their long-term financial health,” according to a press release from consultancy Aon Hewitt.
Data analyzing more than 3.5 million employees shows that while the average participation rate of young millennial workers, ages 20-29, is 73 percent and 77 percent for Millennials ages 30-39, many are saving at a lower rate. Nearly 40 percent of 20-29 year olds and 21 percent of 30-39 year olds are saving below the company match threshold. It's free money!
"Automatic enrollment has significantly improved participation in 401(k) plans for all employees over the past 10 years — but even more so for young workers," said Rob Austin, director of Retirement Research at Aon Hewitt, in the press release. "However, once they're in the plan, young workers seem to fall victim to inertia with many continuing to save only at the default rate, or slightly above and risking their long-term savings by not receiving the full employer matching contributions that are offered."
Why would I want less money now when I’m trying to juggle rent, debt and student loans?
Here’s your answer.
By not matching contributions, millennials are losing out on long-term savings, which I know is hard to care about now but think about it this way.
A 25-year-old who makes $30,000 annually and saves the full company match – $1-for-$1 up to 6 percent – will have have $950,000 saved in their 401(k) by age 65.
If you follow the same rule and start at age 30 you’ll have less than $715,000 saved at age 65. Do the math. That’s about $235,000 lost over your career.
In order to make up the gap, millennials would need to start saving 10 percent of pay each year for the next 35 years. You don't want to get hit with this whammy when you're trying to pay off a mortgage and your kids' college expenses, while you're still most likely paying off your student loans. Sad but true.
"For young workers, it may seem insignificant to increase 401(k) contributions by a few percentage points — particularly at a point in their career and life when they're likely earning a smaller salary — but the long-term effects can be remarkable," explained Austin. "The bottom line is young workers need to save more, starting now."
So the lesson here is, it may not matter to you right now but saving for the company match is what will secure your future down the road. It's all in the numbers.
Monster Wants to Know: Do you save for your employer's company match? Why or why not? Share with us in the comment section.