MONEY 401(k)s

Americans Left $24 Billion in Retirement Money on the Table Last Year

stacks of cash on table
Sarina Finkelstein (photo illustration)—Getty Images (2)

The average worker is missing out on more than $1,300 a year. Make sure to get your share.

Personal savings rose last year, as conscientious workers reined in their spending. But a smaller portion of those savings were stashed in employer-sponsored retirement plans, new research shows. This and other recent findings suggest that the much-vaunted 401(k) match may not be the silver bullet for retirement savings that is widely presumed.

Personal savings jumped to 5.5% last year from 4.6% in 2013, according to data from Hearts and Wallets, a financial research firm. In the same period, average household savings allotted to employer-sponsored retirement plans fell to 22% from 29%. Among households eligible for a plan, only 56% participated, down from 60% the previous year.

Partly due to such behavior, Americans leave a staggering $24 billion on the table every year simply by not contributing enough to get their full employer match, according to a study by Financial Engines, a 401(k) advisory firm. Last year about a quarter of employees failed to collect their full match. The average worker missed out on $1,336 a year in free money—over 20 years, that can add up to $43,000.

The matching contribution is so ineffective at boosting savings that one third of eligible workers past the age of 59 ½ fail to take full advantage, research out of Yale and Harvard shows. That’s an especially dismal showing because these older workers can make penalty-free withdrawals from their plans.

If a 401(k) plan match is free money, why don’t more people take advantage? Inertia explains a lot. That’s why so many employers are switching their plans to automatically enroll new workers and automatically escalate their contribution rate. Another issue is that some workers don’t believe they can get by on less than their full take-home salary, and so they do not enroll or opt out of the plan if they have been automatically enrolled.

Typically, those who miss out on the match tend to be low- and middle-income workers. Ironically, this group would benefit the most from participation because the match would represent a bigger percentage of their income. A typical middle-income worker would more than double his or her annual savings just by raising the contribution rate to get the full match, Hearts and Wallets found.

In the end, the biggest beneficiaries of the 401(k) match are highly motivated savers, who tend be the most highly compensated. That’s why some policy experts and academics have raised questions about the fairness of corporate tax policies that encourage employers to offer a match. Maybe better public policy would be to redirect those tax dollars toward fixing Social Security, which benefits the low-income households least likely to save on their own and who need help the most.

Of course, any changes to tax policy aren’t likely to happen soon. All the more reason to make sure you are saving enough to get your full 401(k) match. Chances are, you won’t notice the difference in your take home pay—it helps that you get a tax break on the amount you sock away. To see how stepping up your savings will get you closer to your retirement goals, try this calculator.

Read next: When $1.5 Million Isn’t Enough for Retirement

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MONEY financial advice

Vanguard’s Founder Explains What Your Investment Adviser Should Do

Jack Bogle, founder of the mutual fund giant, shares what makes an investment adviser worth paying for.

The life of a financial adviser can be very tricky. Many of them believe that leaving a client’s investments alone is the best option, but when, year after year, clients come in asking what the best course of action is for their money, what do you tell them? Jack Bogle, who 40 years ago founded the mutual fund giant Vanguard (it now has about $3 trillion of assets under management), explains exactly what a financial adviser should do and what a financial adviser should say.

Read next: Jack Bogle Explains How the Index Fund Won With Investors

MONEY Savings

This Is The Biggest Threat to Your Retirement Number

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Image Source—Getty Images

The one thing that can suddenly derail your retirement strategy altogether.

The idea of coming up with an exact number for how much you need to save for retirement is an attractive one for savers. By drawing a visible finish line for your retirement savings, a retirement number can be the foundation of your financial planning throughout your career.

In coming up with a good estimate for a retirement number, it’s crucial to understand how having a bad market in early retirement can have a huge impact on the viability of your entire long-term retirement strategy. If you don’t take this risk into account, it could pose a threat to the accuracy of the retirement number you’ve spent a lifetime seeking to reach.

How a bad market early in retirement can snare you
In coming up with a viable retirement number, the ideal situation is one in which you can weather the worst future conditions the financial markets can throw at you. Much of the time, planning for the worst will leave you in far better shape than you expected, as worst-case scenarios don’t occur very often. Yet if you truly want a retirement number that maximizes the probability that your money will outlast you, you can’t afford to ignore realistic future scenarios, no matter how improbable they might be.

In doing research on the retirement-number question, many experts have noticed that the most difficult situations retirees face occur when a major market correction occurs soon after a person retires. Even when overall average annual returns over the long run are similar, a retiree who suffers poor performance early in retirement has a much harder time preserving his assets than one who’s fortunate enough to avoid bad markets until later on. Indeed, in some cases, even a retiree who has ahigher average annual return in retirement still ends up worse off if the worst years come early on.

Experts call this problem sequence-of-return risk, and the problem stems from the fact that retirees need to take withdrawals from their savings in order to cover their living expenses in retirement. In simplest terms, bad performance early in retirement forces you to “sell low” by liquidating investments at fire-sale prices to cover your required withdrawals. If poor initial returns last long enough, then you won’t have enough money to enjoy the full benefit of any future rebound in the financial markets.

2 ways to protect against this retirement-number risk
In response to sequence-of-returns risk, financial analysts have come up with conservative rules of thumb such as the well-known 4% rule to help savers build more secure retirement nest eggs. Using historical data that suggests a typical balanced portfolio with stocks and bonds can make it through tough market conditions for a 30-year period as long as you start out taking no more than 4% of your initial portfolio value, coming up with a retirement number is simple: Just multiply your expected annual income needs in retirement by 25.

However, there are several problems with that approach. First, many people have a hard time saving 25 times their expected net spending in retirement. Also, some believe the 4% rule could be problematic in a low-interest rate environment, because low initial bond yields leave the income-generating side of the portfolio weaker than usual.

An alternative approach uses a different way of thinking about retirement. The benefit of the 4% rule is that it aims to provide exact expectations for what you can safely spend. Yet in reality, most retirees aren’t terribly comfortable continuing to spend at heightened levels when the markets move against them, and they instead look at ways to economize and spend less. Adapting the 4% rule to allow for reductions in withdrawals during lean return years is an idea that has been floating around for years, and research suggests that if a retiree can handle volatile markets by cutting spending, it can reduce the needed multiple of annual expenses from 25 down to 20 or lower.

Stay safe
With markets at high levels now, those who have recently retired are understandably nervous about the potential fallout from sequence-of-returns risk. Your best defense against this risk is to find ways to be more flexible with your financial needs. If you can build in some resiliency to changing future conditions, you’ll be much more likely to aim at a retirement number that will get the job done.

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MONEY Savings

When $1.5 Million Isn’t Enough for Retirement

Q: I am 76 and have been retired for more than 10 years. I have $1.5 million. Is that enough to last till I am 100? How do I make sure I am on track? – William Ricketts

A: It may be surprising that someone who still has $1.5 million a decade into retirement would need to ask if it’s enough. But it’s a legitimate worry. “Whether $1.5 million is enough depends on your lifestyle and spending,” says Theodore Saade, a senior partner at Signature Estate & Investment Advisors in Los Angeles.

Let’s put that $1.5 million in perspective. Using a traditional 4% annual withdrawal rate (increased each year for inflation), a 66-year-old retiring with that amount could safely start out with an income of $60,000 a year, assuming a 30-year time horizon. If you have $1.5 million at age 76, you can withdraw a bit more—perhaps 6% or 7% year—without risking a major decline in your living standards if markets dip. That works out to an income of $90,000 to $105,000.

Read next: When Good Investments Are Bad for Your Retirement Savings

You may not even need to withdraw that much, since you most likely have Social Security income too. A typical single person earning $75,000 a year who claims at full retirement age might receive a payout of $24,000 a year. For a couple, Social Security could easily provide a combined $30,000 to $40,000 a year. All of which suggests you can probably maintain a six-figure income with little risk of running short in retirement.

Whether that income is really enough, however, depends on your spending needs and your financial goals, which might include helping one or more grandkids pay for college or leaving money to heirs. To see if you’re on track, plug in your expenses into a planning calculator, such as Fidelity’s Retirement Income Planner; and to see how long your money will last, try our retirement calculator here.

These projections assume you are keeping your assets invested in a mix of bonds and stocks. Even at 76, you’re still investing for two or more decades, so you need to keep some money in stocks for growth. “It’s not uncommon to live into your 90s and even to 100, and the number of people who do is growing,” says Saade. If you stash that $1.5 million only in low-yielding but stable investments, such as Treasury bonds and money market funds, you may feel more secure. But over those decades, inflation can severely erode your nest egg.

Looking beyond your portfolio, there’s an even bigger risk to consider: incurring medical bills and, especially, long-term care costs. While more people are living longer and healthier lives, the older you get, the more likely it is that you will have some health issues. About 70% of people turning 65 today will eventually need at least some kind of long-term care, which isn’t generally covered by Medicare.

Read next: What You Can Expect from Medicare on Its 50th Anniversary

So it makes sense to plan ahead by checking out costs for long-term care in your area. These prices vary widely by region, but the average stay in an assisted living facility can run $42,000 year, while nursing home care may cost $77,000 or more. Granted, not everyone will need years of expensive care—the average nursing home stay is less than a year. Even so, it’s better to understand your costs and options, says Saade. Odds are, with the right planning, $1.5 million will be enough to meet most of your goals.

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MONEY financial advice

Financial Website Brothers Share Their Best Financial Advice

BrightScope co-founders Mike and Ryan Alfred talk about retirement savings and their biggest money mistakes.

Save until it hurts was the first thing Mike Alfred, a co-founder of BrightScope, said about retirement savings, and that’s part of his best financial advice to give others as well. “Live below your means,” he said, “which sounds very simple in theory but it much more difficult in practice.” His brother Ryan, the other BrightScope co-founder, suggests keeping your investments at arms-length so you’re not tempted to overanalyze them.

Mike said his biggest mistake was buying in to the dot-com bubble, while Ryan talks about how they funded a large part of their business on their own credit cards.

Read next: The Co-founders of BrightScope Share The Painful Secret to Retirement Success

MONEY Millennials

5 Steps Millennials Can Take Now for a Richer Retirement

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Jamie Grill—Getty Images

Start now, and you'll have an even bigger nest egg when you stop working.

A couple of years ago, Emilie Hunt had to go to the emergency room with a stomach virus. The bill took a huge chunk of money out of her savings, more than $800, and kept her from saving for a couple of months.

“I’m really bad at planning for unexpected expenses,” she said. “And instead of cutting other expenses, often the first money I cut is what would go into savings.”

Hunt, an executive assistant at a private equity firm in New York City puts $150, about 2% of her salary, automatically into a retirement plan every month. Her biggest expenses are rent, student loans and food, in that order.

She makes a budget, but doesn’t necessarily stick to it.

“I don’t feel that I’m in trouble,” she said. “But I feel like I’m not growing my savings at the rate I’d like to.”

Many millennials like Hunt are saving for retirement, but not enough. They put away an average of 8% of their salary for retirement, according to investment firm T. Rowe Price’s Retirement Saving & Spending Study, which looked at 1,505 millennials with 401(k)s.

That’s a lot less than the minimum 15% that most experts recommend.

So what can millennials do to save more for retirement? Here are five tips.

Cut Costs

Before you sign a lease or buy a car, think about cheaper options. Housing and transportation are the two biggest costs for most people and significant commitments of your future income, said Stuart Ritter, senior financial planning analyst at T. Rowe Price. A small change can give you a lot of financial freedom.

“There’s a big difference between buying an expensive car, riding a bike or sharing a ride,” said Ritter.

Make a Budget

Track your spending for at least a month. That is the first step for exercising restraint. Otherwise, your spending can sneak up on you. A $3 Starbucks coffee a day adds up.

Categorize your expenses as “needs” and “wants,” and distinguish between the two, said Mark Kantrowitz, senior vice president & publisher at Edvisors.com, a site that provides financial advice for students and families.

“Cable TV is not a need, it’s a luxury,” he said.

If you think it’s overwhelming to make a budget for all your expenses, pick a couple of categories and track them, said Ritter. Apps like Mint, a unit of Intuit, and LevelMoney help you track and analyze your spending habits.

Adjustments

Try increasing your savings for three months. Most people adjust to it, according to Ritter, who warns against having an “all-or-nothing mentality.”

“Some people think they can never go out with their friends if they save more for retirement,” Ritter said. “But maybe it means that you go out two times a week instead of three.”

Be careful with how much you spend after college.

“When people start making a bigger salary, their lifestyle often inflates and suddenly they are living paycheck to paycheck,” said Jason Vitug, founder and chief executive of Phroogal, a company that provides financial advice for millennials.

Phone bills, Netflix and magazine subscriptions are some of the expenses you can reduce, he said.

Save While Paying Off Loans

Student loan debt prevents some millennials from saving, according to T. Rowe Price’s study. But it’s important to prioritize both saving and paying off loans.

First, build an emergency fund of three to six months of salary. Then prioritize paying off your loans, said Kantrowitz. Start by paying off the loan with the highest interest rate.

Make it Automatic

While you are working, you should save a fifth of your salary so that you have money for the last fifth of your life, Kantrowitz advises.

Tell your employer how much you want to save and have the money automatically taken out of your paycheck. That will help you get used to having less money for spending.

Make sure you maximize your employer match, which can be upwards of 6 percent. “That’s free money,” said Kantrowitz.

MONEY retirement income

This Is the Top Secret of Wealthy Retirees

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Barry Winiker—Getty Images

Successful retirees still save nearly a third of income from their pension and 401(k) distributions.

Individuals that have saved successfully for retirement evidently cannot kick the habit. Even after they have reached retirement age they continue to save, on average, 31% of income, new research shows.

In many cases this continued saving comes from income streams guaranteed for life, such as a traditional pension, certain annuities, or Social Security. So further saving may have little to do with financial security—and much to do with a routine that has served them well over the years. If you are looking for the top secret of affluent retirees, it may be just that simple.

Retiree income flows from five primary sources, according to the research from fund company Vanguard. Guaranteed lifetime income is the biggest cut at 42%. Withdrawals from tax-advantaged accounts like IRAs and 401(k) plans are the second biggest source (20%), followed by pay from a part-time job (12%), withdrawals from savings accounts (7%) and from specialty accounts like a cash-value life insurance policy (4%).

The income source matters. Those who mainly get by on withdrawals from a 401(k) or other financial accounts reinvest about a third of what they take out due, say, to required minimum distribution rules. Those collecting guaranteed monthly income save only 25%.

This makes perfect sense. Lifetime income, by definition, never runs out. Those who get most of their income this way are under far less pressure to save anything at all. Meanwhile, those living off withdrawals from financial accounts, which can run dry, show a predictable concern with that possibility.

These are findings worthy of some study in government and pension circles. In coming years, a greater share of retirees will rely more heavily on their own savings, which could undermine spending in general and take a bite out of economic growth. On the other hand, those who get most of their income from withdrawals from financial accounts are more likely to work longer or part-time in retirement, which contributes to the economy and probably the individual health of those doing so.

The Vanguard study looked at households where the head was 60 to 79 years old, had at least $100,000 of investable assets, and at least one member of the household was fully or partially retired. This is an affluent, though not rich, group that continues to save and, in some ways may be doing so inappropriately.

Two-thirds of the money saved from income that comes from financial accounts goes into low-yielding savings vehicles. That might be by design—a desire to lower risk or save for a big purchase. But it might also be the result of inertia—required distributions left unattended. If such distributions are not needed for spending they might be better reinvested in growth or higher income accounts.

It’s tempting to assume that affluent retirees keep saving simply because they have the means to live as they wish and still have income left over. But that probably sells them short. They had to save or work hard for their pension to get there. It’s the habit that made it happen—and once established it’s tough to kick.

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MONEY Savings

6 Reasons Not to Be Ashamed of Your Frugal Ways

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Jamie Grill—Getty Images

Being frugal is hard work.

From time to time we bring you posts from our partners that may not be new but contain advice that bears repeating. Look for these classics on the weekends.

Your friends might label you the cheapskate of the group and your frugal ways might be a running joke, but there’s no reason to be embarrassed by your money-conscious mindset.

A lot of people cry broke and whine about never having enough cash to get by, yet they’re not always willing to do what it takes to free up cash and save money. Being a frugal person is hard work. And if frugality doesn’t come naturally for you, resisting impulse buys can be a daily struggle, and you may go back-and-forth with whether to spend money on an item.

At the end of the day, a frugal mindset benefits your bottom line. So, while others may make you the butt of their money jokes, here’s why you’ll eventually have the last laugh.

1. This is who you are

We all have different money personalities. Some people are big spenders, whereas others hold onto a dime as if they won’t earn another. To each his own.

If you’ve been a frugal person for as long as you can remember, you don’t have to apologize for being you. Everyone has their own way of spending money. Just know that there’s a difference between frugal and cheap. Cheapness can affect the quality of your life, but frugality lets you enjoy the same qualify of life for less. Those who like to spend money might pressure you to loosen the purse strings. But if you’re not bothered by your spending habits, you don’t have to change your ways.

2. You don’t care about keeping up

If you’re committed to being frugal, chances are you don’t feel pressure to keep up with the Joneses or anyone else for that matter. We live in the age of financial peer pressure. This is a big problem in some social circles. If one friend buys a house, then the others are ready to upgrade. If someone wears designer clothes or buys expensive gadgets, then the others have to follow suit. It’s an exhausting cycle that not only reveals an impressionable mind, it keeps people broke.

If you don’t care how others spend their money, and if you’re only interested in your bank account as you should be, being frugal keeps your head out the clouds.

3. It’s a financial necessity

Others might pressure you to spend money or make comments about your frugal ways. But if you’re frugal out of necessity, there’s no reason to be embarrassed or ashamed, especially since you’re willing to sacrifice more than a lot of people.

When dealing with money problems, some people want to save face, so they don’t make adjustments to their lifestyle. They continue with old habits, even if it further complicates their situation. A frugal person, on the other hand, does whatever it takes to save money so they can keep a roof over their head, food on the table and clothes on their back.

4. You might have a bigger bank account

This isn’t a guarantee, but if you choose not to spend your extra income, you’ll probably have a bigger bank account than those who poke fun at you. So, the next time you feel ashamed or pressure to adjust your frugal mindset, look at your savings account and consider how most Americans don’t have enough in their savings to handle a small emergency.

5. You can reach your goals sooner

You might have a long list of financial goals, but without a lot of extra money, it can take years to fulfill these goals. Being frugal speeds up your progress. If you reduce spending and free up cash in your budget, you’ll have income to pay off debt, save for vacation or prepare for retirement.

6. You’re teaching your kids good money habits

Kids often mimic the money habits of their parents. Remember this the next time you start feeling embarrassed about your frugality. If you’re an irresponsible spender, your children could imitate this behavior in adulthood with long-term financial consequences. But if your kids see you pinching pennies, looking for deals, and taking advantage of other opportunities to save money, then they’ll probably develop similar good financial habits. And if your children become savvy savers, they can build a firm financial foundation with less debt than their peers and a bigger nest egg.

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MONEY Savings

Here’s How Much Cash You Need in Retirement

Q: I am in my eighth year of retirement. A few years in, I found myself spending a considerable amount on repairs and upkeep on my old house. I also had to replace my car. Luckily, I was able to build up a reserve fund to cover costs so I didn’t have to dip into my investments for these “life happens” events. What is your advice on how much cash a retiree should have on hand to feel secure? – Karen Hendershot

A: Of course, everyone should have a cash cushion to handle unexpected expenses, but retirees need a larger cash reserve than people who are still working, says Richard Paul, president of Richard W. Paul and Associates in Novi, Mich. “The stakes are higher for retirees,” Paul says. “When you’re no longer earning an income, the money you have saved isn’t easily replaced.”

If you need to tap your investments for emergencies, you risk spending down your portfolio too quickly. And if you have to sell securities in a down market, you’ll need to take a bigger chunk to get the amount you need.

Relying on your investments for unexpected expenses could also trigger some nasty tax consequences. If you liquidate money from a taxable account, the income could bump you into a higher tax bracket and cost you even more.

So, how much do you need? While the standard recommendation is to have six to 12 months of money set aside to cover emergencies, retirees should have at least 12 to 18 months of cash, says Paul. That should be enough to cover daily expenses as well as any emergencies that might crop up. “This creates a safety valve, so you’re not at the whims of the market,” he says. Use an interactive worksheet like this one from Vanguard to tally up your monthly expenses.

Exactly how much you will need depends on your individual circumstances. If you have guaranteed cash flow, say from a pension and Social Security, that covers your daily expenses, you won’t need to have as much set aside as someone who is already withdrawing money from a portfolio to cover living costs. You can’t foresee emergencies but you can plan for them. If you have an older home, for example, you can anticipate needed repairs or upgrades like a new roof. If you have any medical issues, you’ll want to keep a larger stash for medical costs. “Medicare doesn’t cover everything,” Paul notes.

Since people tend to enter retirement with most of their money tied up in investments, such as 401(k)s and IRAs, Paul recommends that you start building up an emergency fund before you retire. While you’re still earning, start funneling money into a savings account and move a portion of an IRA into a short-term bond fund.

On the flip side, you don’t want to keep too much of your savings in cash. You won’t earn much interest in a money market fund or basic savings account, so balance that cash cushion with investments that can keep up with inflation. “You still need your money to grow,” Paul says.

MONEY financial advice

How to Become a 401(k) Millionaire

Fidelity Investments' Jeanne Thompson lays out three simple steps.

For millennials, retirement is something that feels like it’s forever away, which is a good thing when it comes to preparing for it. Jeanne Thompson, Fidelity Investments’ vice president of thought leadership, lays out three simple steps for hitting the ultimate 401(k) milestone: a million dollars.

1) Save a lot. Seriously, save as much as you can. One of the BrightScope co-founders phrases it simply as “Save until it hurts.

2) Start now. When you start saving while you’re young—Thompson says 25 at the latest—you give your money as much time as possible to mature alongside you.

3) Invest for growth. Keep your eye on stocks, and don’t shy away from aggressive investments.

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