If you’re saving for retirement through a workplace plan such as a 401(k), that’s a great start. But you’ll likely still need to make a few small changes to ensure you’re on track.
You may not be. Although many companies automatically enroll new employees in their 401(k), they often set your initial contribution rate way too low.
To have a shot at a secure retirement at age 65, you’d need to start saving at least 10% of your salary at age 25, according to research from the Center for Retirement Research at Boston College. That 10% includes your own contributions, as well as any matching funds from your employer. If you wait until you’re 35 to get serious about retirement saving, researchers estimate, you should aim for a 15% savings rate.
To compare, just 1.5% of plans with automatic enrollment had a default contribution rate of more than 6% in 2016, according to the Plan Sponsor Council of America. About 46% enrolled workers at contribution rates of 3% or less.
“Saving 3% for retirement is not going to get the job done,” says John Iammarino, founder of Securus Financial in San Diego.
Here’s how to make sure you aren’t just saving for retirement, but are saving enough.
When you save in a workplace retirement plan, you typically are eligible for a matching contribution—that’s free money that your employer will kick in. Every plan has its own formula for how the match works. A common offer is that the employer will give 50 cents for every $1 you save on up to 6% of your salary. So for example, if you contribute 6%, your employer will add its maximum match of 3%. But if you’re only saving 3% of your salary, you’re getting just a 1.5% match.
“A match is like a bonus. And you sure don’t want to turn down what you’re entitled to,” says Skip Johnson, a founding partner at Great Waters Financial, an advisory firm in the Minneapolis area.
Workers who were auto-enrolled could easily be missing out. In a recent report from benefits consulting company Callan, less than half of plan sponsors (that’s the employer) said they chose an initial contribution rate that would give employees the full company match.
To make sure you’re getting all the free money you’re entitled to, reach out to Human Resources and ask what contribution rate is needed to earn the maximum company match. If your rate is currently lower, you can usually ramp it up immediately.
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If you can afford to boost your contribution rate now, great. You may also have access to a feature called auto escalation that will bump up your savings rate automatically once a year, generally by one percentage point. You could even time that increase to a date of your choosing—say, the start of the year, or around the time your company hands out pay raises.
It doesn’t sound like much, however just 1% more can have a big impact on your retirement balance. For someone making $50,000, 1% is just $500 more a year—but over a 40-year career, those extra annual contributions could grow to nearly $83,000.
The weird thing is that according to Callan, 4 in 10 employers require you to actively raise your hand and say you want to have auto escalation. Once again, check in with HR to make sure you’re signed up.
Johnson also recommends making it your goal to save half of every raise. For example, if you get a 4% raise, vow to immediately increase your 401(k) savings rate by two percentage points. “Your future self is going to thank you,” says Johnson. “Within a few years you will be saving at 15%, and from there you’re off to the races.”