Don’t Assume the Default 401 (K) Input Is Enough
When you opened your 401 (k), you were probably presented with several default options. For example, your workplace automatically translates 3% of your salary into 401 (k) contributions. You may have been told that a company would match your dues of up to 5%, so you decided to pay 5% to get this company to match. (Hey, that’s free money!)
You may have believed that whatever amount your employer and / or plan administrator asked you to contribute was the “correct amount”. I knew I did it when I first opened an employer-sponsored savings plan.
We are not alone. As MarketWatch reminds us, many people think the default contribution size is the best option:
[…] this attitude often leads people to mistakenly believe that the savings rate that their employer chooses for them upon automatic registration will be sufficient to meet their retirement savings needs.
Of course, MarketWatch also notes that while saving 3% or even 5% on retirement is better than nothing, it probably won’t get you where you need to go:
When companies use auto-signup, many start with 3% savings by default. This is a place to start, but for most of us, it won’t get us into the retirement we want.
The problem is that many of us base our mental image of “how much to save / spend” on “whatever quantity is presented to us by default.” (This is why retailers love to show us a $ 249.99 item that has been discounted to $ 199.99; higher numbers become the default and we assume we shouldn’t give up on a good deal.)
So instead of accepting any number of 401 (k) contributions we are offered, we should instead ask ourselves how much we can afford to contribute, especially if we are in the early stages of our careers and can take advantage of decades of cumulative growth. investment.
It is also worth considering the negative effect of compounding ; how much money do you give up in the long run by investing 5% instead of 7%, 10% or 15%? There is a reason that financial advisors often suggest increasing your pension contributions by 1% every year , but even that number should not be the default – if you can afford to increase your contributions by 5% or literally any other number , do so.
And don’t tell yourself you will do it tomorrow, because we all know what that means . Tell yourself that you are going to calculate the optimal rate of retirement savings today, and if today is not working, write it down in the calendar for the near future. I suggest Thursday as the default day, which you can now schedule.