When I was sitting in my employers’ benefits meeting the following question was asked, “How many of you participate in our companies’ 401k plan?” Intrigued, I looked around, and to be honest, I was pretty disappointed by what I saw. I’m not going to give away exact numbers so that if there is a competitive reason that the business doesn’t want us discussing exact percentages I’m not going against that desire. I also decided that this observation could turn into an opportunity to examine 401k usage across the US.
My curiosity piqued, I started looking around trying to see what 401k participation was like at different businesses that would share their statistics. I was pretty depressed by what I saw. I came across a Wells Fargo press release about the data that they have, and in that article they said that generally (depending on demographics) only 40-59% of people were enrolled in their companies plans. Those numbers are an unmitigated disaster for the retirements of millions of Americans. Combine that with a recession, or economic shock that will eventually hit us, and that number of participants is going to go down even further.
The Importance of the 401k Plan for Your Retirement
As always, examples help to illustrate the importance of contributing to your 401k plan. Imagine a young woman named Winifred who gets a job at Boeing. Winifred is a model student with a passion for physics and aerospace engineering. Since she is new, she is making about $60,000 a year. Since Winifred is very mathematically inclined, and listened to her personal finance professor in college, she realizes that for better of worse the US has pretty much scrapped the pension system in favor of our 401k driven retirement system. At 23 years old, she also realizes that the opportunity cost of her actions are extremely high. With Boeing having one of the most generous 401k plans, she also realizes just how important it is for her to take advantage of the situation that she has worked so hard to achieve. She decides that she wants to ensure financial independence for herself.
With Boeing providing a 75% match on the first 8% of base pay, the total amount of money that will be going into Winifred’s 401k is 14% of Winifred’s $60,000 salary. That is $8,400. If Winifred never gets a pay raise, she never gets a promotion, or any other scenario that doesn’t increase her pay, she will still retire a multimillionaire. If her plan is able to achieve a 7% rate of return, and Winifred retires at 65, she will have $1,937,310. At a 4% withdrawal rate, Winifred will be pulling down a little more than $77,000 a year in retirement!
The matches that most companies give with their 401k plans, combined with the tax deferred benefits that congress gives you to save, make investing in your 401k one of the most important things you can do for your financial security. When I hear about how it is only 40% of people who are participating in their 401ks, it breaks my heart, because that means that millions of Americans are walking away from thousands, and sometimes millions of dollars that they should have been able to enjoy in retirement. So please participate in your companies 401k plan.