Too many of us don’t think we have enough disposable income to invest in our retirement. Sure it would be great if every employee maxed out on their 401k contributions every year, but the reality is that most people don’t have the finances or discipline to do this.
My first challenge to my employees is to “do more”. Contribute 1% more than you did last year. Plan your increase in 401k contributions with your raise so you don’t notice the increase. A recent report published in USA Today reported that “more than 45% of 18 to 23-year-olds have spent more on coffee than investing in their retirement, and 35% of 24 to 35-year-olds have done the same”. An employee who earns $50,000 a year could contribute $1300 (2.6%) to their 401k for the same cost of buying a $5 cup of coffee every work day for a year. Most people can find somewhere to cut back that would allow them to contribute more to their 401k.
My second challenge to employees is to start contributing NOW. The chart below shows three employees who contribute $1,000 a month to their 401k for 10 years starting when they are 25, 35, and 45 years old. All three employees contributed $120,000 toward their 401k. The employee that started contributing to his 401k when he was 25, Michael, had a balance of $1,444,969 when he was ready to retire at 65 years old. The employee that waited until he was 45 to start investing in his 401k, Sam, only had $373,407 when he was ready to retire at 65 years old. Let compounding interest work for you!
As an employer, there are several things we can do to help our employee prepare for their retirement. Here are a few:
· Employer Match – If an employer is giving any match, this is a guaranteed (once the match is vested) return on investment for employees.
· Auto Enrollment – Sometimes employees just need a little nudge. Since implementing auto-enrollment starting in 2016, our company has only had 1 person opt out of 401k.
· Allow Employees to Contribute Sooner – Even if the employer match doesn’t start right away, let the employees start contributing as soon as possible.
· Auto Escalation – Make it easy for employees to increase their contributions without having to take action to increase their contributions every year.
· Education – Employers should consistently get in front of their employees and show them the importance of investing in their future.
· Profit Sharing – Employers can contribute to their employee’s retirement funds regardless of the employee’s contributions.
America Saves Week is February 27th to March 4th, 2017 and is a great time to remind employees to be active in preparing for their retirement and for employees to examine their plan to see if there are any changes to be made that would better prepare them for retirement.