Saving money is often considered "not American" -- it's just not something that's ingrained in the minds and lifestyles of most people in this country.
When you look at the data, it's pretty clear that most Americans don't prioritize saving money -- and now new research shows just how bad the problem really is.
According to an analysis of tax records by Census Bureau researchers, less than a third of Americans are saving money in a 401(k) or other workplace retirement program.
Two-thirds of Americans don't contribute to a 401(k) or other employer-sponsored plan
Although nearly 80% of Americans work for an employer that offers some type of retirement plan -- whether it's a 401(k), 403(b) or something else -- only 32% of workers actually put any money in the account, according to a working draft of a Census Bureau study by Michael Gideon and Joshua Mitchell.
Until now, the severity of the problem has been somewhat unclear -- since the data has mostly relied on responses to various surveys, as well as information provided by small businesses and American workers -- and many workers don't even understand the plan(s) available to them.
So for a new study, the researchers analyzed 2012 tax data from 155 million American workers -- in order to come up with more reliable statistics. And after analyzing the data, it became clear that the problem is a lot worse than what previous studies had revealed.
“Not saving enough is a long-held American tradition, right up there with baseball and apple pie,” said Greg McBride, chief financial analyst for Bankrate.com. “There’s no disputing that people are undersaving for retirement in a serious way.”
Why Americans aren't saving for retirement
While most U.S. workers have access to an employer-sponsored retirement savings plan, the analyzed tax data revealed that it's mostly workers at large companies who have this option -- while many Americans who work for small businesses don't.
Check out this chart from Bloomberg, based on the Census Bureau research:
The good news is that the data estimates nearly 80% of Americans now work at a place where they are offered some type of employer-sponsored plan -- which is a much higher number than previous estimates.
However, the bad news is that two-thirds of all working Americans aren't even contributing to these accounts -- either because they aren't eligible or just haven't signed up. Many companies require employees to work there for a certain period of time before they are eligible for the 401(k) or other workplace retirement account, while part-time workers are also typically required to work a certain number of hours before becoming eligible.
One of the biggest reasons people aren't saving in these retirement accounts is that they simply don't understand them, don't know when or how to sign up and often aren't given much guidance from their employer on the process in general -- except maybe on the first introduction day where someone hands you a bunch of papers and speeds through company policies, benefits etc., and you walk out knowing less about your new job than you did when you walked in.
So here's a look at the benefits of contributing to these accounts and how to get started.
What to know about a 401(k) and how to get started
There are several options for you to save for retirement -- but one of the easiest ways to get started is if you have a 401(k) or other plan available at work. One great benefit is you can have the money automatically taken out of your paycheck and sent straight into the 401(k) account -- that way you don't see the money, so you can't spend it.
The process makes it so easy for you to put money away for retirement without even having to think about it.
If you aren't sure whether you're eligible for the plan at your company, reach out to your manager or someone in HR who can provide you with the information and materials you need to understand what options are available to you.
At some companies, whenever an employee becomes eligible it's the responsibility of the worker to start contributing money to the account. While on the other hand, many other companies will automatically enroll eligible employees into the 401(k) or other plan -- only requiring you to take action if you don't want to save.
Here's a quick look at exactly how a 401(k) plan works:
Getting the most out of a 401(k)
In a nutshell, a 401(k) is a retirement savings account offered by your employer, so the company you work for.
It lets you save and invest a piece of your paycheck before taxes are taken out, and then you don’t pay any taxes on the money in a 401(k) account until you withdraw from it — ideally, when you’re retired.
So once you decide how much of your annual salary you want to contribute each year, you can have the money automatically taken out of your paycheck before you even see it.
How to maximize your 401(k) savings
If your employer offers a match on your 401(k) or other plan contributions, then ideally, you want to put in at least enough to get the match. For example, many companies will match 50 cents on the dollar up to 6%.
So let’s say you’re making $30,000 and you put 6% of your annual salary into your 401(k), which is $1,800. That means your company will then put in 3%, so another $900, allowing you to save a total of $2,700 a year in your 401(k).
Matching plans vary, so make sure to check with your company to find out exactly how much they will match (or if they even offer a match).
When you’re just starting out and can’t quite afford to contribute that much of your paycheck, start with just 1% — you won’t even notice that small of an amount missing. Then every six months, bump that up by another 1%, and after just a couple of years, you’ll get pretty close 6%!
The gradual increase is slow and small enough that you won't miss the money.
What if your employer doesn't offer a match or any retirement savings plan at all?
The employer match is the greatest benefit of a 401(k), because it's pretty much free money. Saving in a 401(k) is also an easy place to start because the process, from setting up the account to making contributions, is handled entirely by your employer -- which means very little to no effort on your part.
But there are two important things to keep in mind:
- If your employer offers a match: Only contribute enough to get the match. Then put any extra savings for the future into a Roth account.
- If your employer does not offer a match: You can still contribute a small percentage of your pre-tax income to the 401(k) or other workplace plan, and then put any extra savings into a Roth -- that way you have savings in separate accounts with different tax benefits.
Here's why a Roth is one of your best retirement savings options.
How to start saving with a Roth
A Roth is a modified individual retirement account (IRA) in which a person can set aside after-tax income up to $5,500 per year ($6,500 for those age 50 or older). Earnings on the account are tax-free, and tax-free withdrawals may be made after age 59 1/2. And you can set up a Roth account yourself.
The tax-free status of a Roth beats just about every other retirement savings option out there. Even if you have a 401(k) at work, you can open a Roth in addition to that as a way to put more money away for the future in a tax-friendly account.
So where do you put the money? Just about anywhere you want: A bank; credit union; full-commission stock broker; financial planner; in no-load mutual funds (a fund sold without commission) or with a discount stock broker. When you are young, it's for you to put the money with a discount broker or a no-load mutual fund. That way all your money is working for you -- and not going toward fees.
Roths are really flexible depending on which company you choose to put your money into. You can start with as little as $100 with some companies, or $500 or $1,000 with others. (Here are some of my favorite low-cost investment options, broken down by the dollar amount you need to get started. )
What's required on your part: With a Roth, you first have to be disciplined enough to set up the account -- then you can set up automatic contributions to the account each month. You just want to make sure you have the money in the budget to do it -- so go through your budget and figure out how much extra money you can save each month and set up the automatic withdrawals.
If you are self-employed, consider opening up a simplified employee pension (SEP):
- The paperwork to set up a SEP is simple, and you can typically open it wherever you want -- at a low-cost investment house, for example -- at no cost. SEPs work like a traditional IRA or a 401(k), with a current year tax deduction, but withdrawals are taxed at retirement. They also offer flexibility, in that you can put in nothing in a year or as much as $53,000. That can be really helpful during the feast or famine years when you're launching a business.
Time is your greatest asset
The earlier you start saving, the better.
Compound interest is an extremely powerful force that allows investors to earn exponentially larger gains on their money over time -- so the money you save now is worth a lot more than the money you save later.
Here's a simple example: You invest $1,000 today and earn an annual 5% gain, so $50. That $50 is added to the principal amount of your investment, and then next year, you earn a 5% gain on $1,050, so you earn $102.50. And so on...
This is why the it's crucial that you start saving as early as possible.
Here's another example: if a 16-year-old saves $2,000 annually for six years, putting the money into a Roth IRA account, and stops at age 21, he or she would have $1 million by age 65.
This assumes a 9.4% average gain annually, which has been the average return on the stock market since 1926.
So the earlier you start putting money away in a retirement account, the more time it has to earn you a lot more money. If you keep telling yourself you can always save later, and even if you do contribute a lot more later than you would now, that money still wouldn't have the time to grow like it would if you saved now.
Bottom line: Saving money early -- not even often, just early -- will still ultimately lead you to bigger wealth at the time of retirement. And if your employer offers you free money to help you save, you should do whatever it takes to take advantage of that!