Subscribe for Ideas

Don’t Assume the Default 401(k) Contribution Is Enough

When you opened up your 401(k), you were probably presented with a few default options. Maybe your workplace automatically put 3% of your paycheck towards 401(k) contributions, for example. Maybe you were told that the company would match your contributions up to 5%, so you elected to contribute 5% to get that company match. (Hey, it’s free money!)

Maybe you assumed that whatever number your employer and/or plan administrator suggested you contribute was the “right amount.” I know I did, when I first opened an employer-sponsored savings plan.

We’re not alone. As MarketWatch reminds us, a lot of people think the default contribution amount is the best option:

[…] this setup often leads people to assume, incorrectly, that the savings rate their employer picks for them during automatic enrollment will be enough to meet their retirement savings needs.

Of course, MarketWatch also notes that although saving 3% or even 5% for retirement is better than nothing, it probably won’t get you where you need to go:

When companies use automatic enrollment, many start people out at a 3% savings rate as the default. This is a place to start, but for most of us, that’s not going to get us to the retirement that we want.

The trouble is that many of us base our mental gauge of “how much to save/spend” on “whatever number is presented to us as the default.” (This is why retailers like to show us a $249.99 item that has been marked down to $199.99; the larger number becomes the default and we assume we shouldn’t pass up a good deal.)

So instead of accepting whatever 401(k) contribution number is put in front of us, we should instead ask ourselves how much we can afford to contribute—especially if we’re in the early stages of our career and can take advantage of decades of compound investment growth.

It’s also worth considering the negative compounding effect; how much money are you giving up, long-term, by investing 5% instead of 7% or 10% or 15%? There’s a reason why financial advisers often suggest to increase your retirement contributions by 1% every year, but even that number shouldn’t be taken as a default—if you can afford to increase your contributions by 5%, or literally any other number, do it.

And don’t tell yourself you’re going to do it tomorrow, because we all know what that means. Tell yourself you’re going to calculate your optimal retirement savings rate today, and if today doesn’t work, put it on the calendar for the near future. I’ll suggest Thursday as a default day that you can now schedule around.

 

This article was written by Nicole Dieker from Lifehacker and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.