Putting away more while depending less on pensions

Chicago TribuneMay 18, 2014 

20130429 401k fees

300 dpi Rick Nease illustration of hand pulling a dollar bill from a piggybank labeled "401k'; can be used with stories about unknown fees taken out of your 401(k) savings. (The Detroit Free Press/MCT)


Are you saving more for retirement?

A recent study by Fidelity Investments found that over the past 12 months, 1 in 5 employees upped their 401(k) savings rate — the highest percentage since Fidelity began tracking the number seven years ago.

What has brought on the savings bug?

Jeanne Thompson, a vice president at Fidelity, says more people are realizing they can't rely on a pension anymore to fund old age. "The bulk of retirement income is going to come from their 401(k)," she said.

But programs that automatically raise contribution rates are also playing a role.

According to the study, 38 percent of savings increases were due to auto-escalation programs that raise your 401(k) contribution for you. For Gen Y workers, auto-escalation accounted for half of all contribution increases.

Sign up for savings increases. Putting away more money for retirement is a good thing.

On average, workers are socking away 8 percent of their salary per year in a 401(k), plus any employer match (typically 3 percent or more). Most financial planners recommend an annual savings rate of 10 to 15 percent.

And more than three-fourths of employers now offer an auto-increase feature for contributions.

To take advantage of it, you may have to sign up online or by phone. But some companies will enroll you automatically, typically raising your savings rate by a percentage point per year, up until a cap (which you can adjust).

In 2014, the most you can save in a 401(k) is $17,500, or $23,000 if you're age 50 and older.

If you don't want to participate in the auto-escalation program, you can opt out. But Fidelity found that only 7 percent of employees do that.

"Inertia takes over," Thompson said.

And when inertia leads to consistent saving, the payout can be big. According to Fidelity, at the end of the first quarter, the average 401(k) balance across all plan participants was $88,600.

But looking at people who've had their account for 10 years and more, the sum was much higher, on average $238,400.

Raise contributions on your own. Not everyone is saving more, though, especially workers who are auto-enrolled in a 401(k) plan.

Of those plan participants, Fidelity found that the average savings rate was just 5 percent. The reason: Most auto-enroll programs start off at a paltry 3 percent contribution rate.

And unfortunately, less than half of companies that automatically enroll workers in a 401(k) plan offer an auto-increase feature.

That may change, Thompson says. In the meantime, get on track by setting up your own auto-increase plan, of sorts. Pick a time once per year — say, Jan. 1 — and raise your contribution rate by a small amount. Do that until you're saving 10 percent or more (including any employer match).

The savings will add up.

Let's say you're 25 and earn an annual salary of $40,000, with an expected pay raise of 3 percent per year. If you increase your savings rate from 5 to 10 percent over five years and continue socking away 10 percent until you reach age 67 (full retirement age), your savings could grow to $1.3 million (assuming an annualized return of 7 percent).

But if you save only 5 percent, you'll accumulate slightly more than half as much.

To get motivated, run the numbers yourself. Use the Contribution Accelerator Calculator at PrepareWithPru.com.

Carolyn Bigda writes Getting Started for the Chicago Tribune. yourmoneytribune.com.

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