Understanding exactly how your 401(k) works is no easy feat. Enrolling in your account, figuring out where to invest your money, and determining how much you need to save can sound intimidating, and sometimes the easiest solution is to put off saving for another day to avoid getting lost in all the 401(k) jargon.
Putting off saving won't do your retirement fund any favors. And yet roughly a quarter of workers may be inadvertently putting themselves at risk by not taking advantage of their 401(k), as only about 74% of those with access to a 401(k) actually participate in it, a new report from Vanguard found.
Saving for retirement is hard, but it's even harder when you don't get started. Your 401(k) is one of the most powerful tools in your retirement toolbox, and not taking advantage of it could end up hurting your financial future.
Image source: Getty Images
Why people aren't using their 401(k) -- but should be
Simple inconvenience may be part of the reason why people don't begin saving for retirement. If you're not sure how to get started saving or don't know how much to save, it may be tempting to avoid the issue altogether by not saving at all. However, most 401(k) plans make it easy to enroll, either by auto-enrolling new employees once they're eligible or allowing workers to sign up online and start contributing to their account. With most plans, you're also allowed to automatically transfer a portion of every paycheck straight to your 401(k) -- making saving money easier when it never reaches your bank account in the first place.
Job hoppers who never stay in one place for more than a year or two may also avoid using their 401(k) because they don't see the use in saving for a couple of years only to end up leaving their job. Younger workers, in particular, are more likely to jump from one job to the next -- around 21% of millennials say they've changed jobs in the past year, according to a Gallup poll, which is three times the number of nonmillennials who say the same. But if you're a job hopper who is putting off saving until you settle into a steady career, you're losing out on years (or even decades) of precious time to grow your savings.
Even if you're currently bouncing from opportunity to opportunity, it's still valuable to save what you can in your 401(k). Then when you leave your job, you can either roll the money over into your new 401(k) (if your new employer allows it) or move it into an IRA. Even if you have multiple 401(k)s from several previous jobs, you may opt to consolidate them all into one or two accounts to make it easier to keep track of all your money.
Finally, high fees and investment costs may be a deterrent to some people when it comes to participating in their 401(k). All retirement accounts charge fees, and if you're paying higher fees than average (which is about 1% of total assets under management, according to a study from the Center for American Progress), it may seem like a smart idea to invest your money in an IRA with lower fees rather than a 401(k). In some cases, that may be true. But a full 95% of organizations that offer 401(k)s also offer some type of employer contribution, Vanguard found. So if you could be receiving free money from your employer, it's wise to save enough in your 401(k) to max out any employer contributions before investing the rest of your savings in an IRA.
How to make the most of your 401(k)
Getting started contributing money to your 401(k) isn't as difficult as it may seem. Usually, all it takes is visiting your plan's website to enroll and designate how much of each paycheck you want to contribute to your account.
If your employer offers matching contributions, that's a factor to consider when deciding how much you should save. Always aim to save at least enough to earn the full employer match. So if your employer will match your contributions up to 3% of your salary, be sure to set aside at least that much to earn the full match.
Ideally, though, you should be saving more than just 3% of your paychecks. Exactly how much you should save depends on how much time you have left before retirement, but the average 25-year-old should aim to save around 10% to 17% of their income each year if they want to retire at age 65, according to a study from the Stanford Center on Longevity. For those off to a later start, researchers found you'd need to save 15% to 20% of your salary if you started saving at age 35, and around 25% to 27% by beginning at age 45.
It pays to start saving earlier, because when your money has more time to grow, you don't need to set aside as much every month to reach your goal by the time you retire.
Taking advantage of your 401(k) is one of the easiest ways to save for retirement, but simply getting started is the first hurdle to overcome. Once you get into a steady rhythm of saving, your retirement goals will be all the more achievable.
More From The Motley Fool
- 10 Best Stocks to Buy Today
- The $16,728 Social Security Bonus You Cannot Afford to Miss
- 20 of the Top Stocks to Buy (Including the Two Every Investor Should Own)
- What Is an ETF?
- 5 Recession-Proof Stocks
- How to Beat the Market
The Motley Fool has a disclosure policy.