401(k) Accounts – Three Reasons Employees Should Max Them Out. Many American workers report feeling financially stressed and strapped, but one area they can’t afford to skimp on is saving for retirement. Unfortunately, however, many do. They either don’t recognize the benefits of saving in their employer-sponsored retirement plan, or they simply think they can’t afford to put aside money for their future. After all, for many, retirement is a long way off. Why worry about it today?
Here are three compelling reasons you can communicate to your workforce to help them adopt a different mindset about saving for retirement and consider maxing out their 401(k) account, even if they only stick with a hardcore savings program for a year:
- Obvious, but meaningful – it’ll help your participants build a bigger nest egg. Even contributing excessive amounts to their retirement savings for one year can add up thanks to compounding, making a significant difference over time.
For example, a 25-year-old participant who contributes $18,000 to their 401(k) (the maximum elective contribution limit for 2017), assuming an annual 7% rate of return, could potentially have $269,000 by age 65. Even those who max out their 401(k) contributions at age 45 at a presumed 7% annual return could have an extra $69,000 at retirement. That may be compelling enough to prompt participants who have the means — or those who see the benefits of living frugally for a year to do so — to go all in on their retirement savings for a year.
And that’s not all. That participant who maxes out their 401(k) at age 25, and continues to contribute just $6,000 a year to their 401(k) account for the rest of their career? Assuming the same 7% annual return, they could accumulate $1.38 million by retirement. For some participants, especially younger ones with potentially fewer financial obligations and more time to benefit from compounding, the long-term gain may be worth the near-term sacrifice, especially if they can see the payoff for themselves. So illustrating real-world examples like these in your communications can be impactful.
- If your company offers an employer match, participants who max out their 401(k) account contributions are pretty much guaranteed to receive it (depending on the match formula). By doing so, they not only add extra savings of their own to their 401(k) account but stand to grow their balance by getting the match. Furthermore, all of that money, once invested, will likely grow even more over time. More money to make more money? Who wouldn’t want to take advantage of that?
- Another compelling reason to help convince employees to save as much they can for retirement now is that someday, they might not be able to rely on that income. Situations like job loss, sudden illness or other financial circumstances may prevent them from being able to contribute to their 401(k) in the future. So it pays for all employees — again, especially the younger crowd — to save while they can.
While maxing out their 401(k) account for a single year may come with tremendous sacrifice, it will be well worth it at retirement. Clearly communicate the benefits of doing so, incorporating the three compelling reasons highlighted above. Some participants might rise to the challenge, and with a little perseverance, could significantly increase their retirement savings. And who knows? If they do it for a year, they might hop on board for a second or a third year, which can go a long way toward improving their retirement readiness. After all, anyone can do anything — even make short-term financial sacrifices to maximize their retirement savings — for just one year.
Robyn Kurdek is a 401KTV contributor. Please click Here for more info.
