When it comes to saving for retirement, it’s tough to tell whether you’re doing enough to prepare. Everyone has different retirement goals, and what one person is saving won’t necessarily match up to what you should be socking away.
If you’re fortunate to have access to a 401(k) with matching contributions from your employer, it’s smart to save enough to earn the full match. But if that’s all you’re saving, you could unintentionally be putting your retirement in jeopardy.
Why the employer match alone isn’t enough
Nearly a third (30%) of workers only save enough in their 401(k) to earn the full employer match, according to a survey from Alight Solutions. While that’s great (after all, save anything less than that and you’re missing out on free money), it’s simply not enough if you want to retire comfortably.
Among 401(k) plans that offer matching contributions, the most common type of match is $0.50 for every dollar the employee contributes up to 6% of his or her salary, according to a report from Vanguard. If you’re contributing enough to earn the full match, you may think you’re doing enough. In reality, though, you may not be saving nearly as much as you should.
Depending on your current age, the age you plan to retire, and how much you already have saved for retirement, you will likely need to save at least 10% to 15% of your wages to retire comfortably. If you’re only contributing around 6% of your salary between your contributions and your employer match, you’re probably not saving enough.
To see how much of an impact this can have on your savings over time, let’s look at a hypothetical example. Say you’re earning $50,000 per year, and your employer will match $0.50 for every dollar up to 6% of your salary — or $1,500 per year in this case. By saving a total of $3,000 per year and taking into account that extra matching money, you’d have around $425,000 saved after 30 years, assuming you’re earning a 7% annual rate of return on your investments.
That’s a good chunk of change, but unless you have modest spending needs, it probably won’t last you your whole retirement. So, instead of assuming you’re going to be fine simply because you’re earning the full match, it’s more important to consider how much you should be saving based on your individual situation.
How much should you be saving for retirement?
First, if you haven’t already, set a goal for how much you want to have saved by the time you retire. The easiest way to estimate this number is to plug your information into a retirement calculator, but keep in mind that your results will only be as accurate as the numbers you put in.
Before you calculate your retirement number, try to get a good idea of how much you expect to spend each year once you retire. It could be more or less than what you’re spending now, so don’t simply assume you’ll continue spending the same amount in retirement. Think about whether you plan to travel or pick up expensive hobbies, for example, and how those expenses will factor into your retirement budget.
Also, be realistic about what age you plan to retire. If your savings are falling short, you may be banking on the idea of working for as long as possible. However, if you’re forced into an early retirement, either due to job loss or health issues, you may not have as much time as you’d hoped to save.
Finally, it’s a good idea to think about how much help you’ll receive from Social Security. Your benefits are only intended to replace around 40% of your pre-retirement income, so you won’t be able to rely too much on your monthly checks to pay the bills. And if you claim before your full retirement age (which is either age 66, 67, or somewhere in between), you’ll receive smaller checks each month — which could impact how much you’ll need to save on your own.
Once you have all this information, run your numbers through a retirement calculator to get an idea of how much you should save by retirement age, as well as what you’ll need to save monthly to get there. That, then, will help you determine what percentage of your salary you should be saving for retirement.
Employer matching 401(k) contributions can give your savings a serious boost, but they can also give you a false sense of security and make you think you’re doing enough to save for retirement by simply maxing out your match. The sooner you discover how much you should really be saving, though, the easier it will be to reach your goals.
