How NOT to Save for Retirement

A report by the Employee Benefits Research Institute provides a startling example of how NOT to save for retirement. The study, released in November 2010, examines various aspects of 401(k) account balances. A 401(k) plan typically allow both an employer and its employees to contribute to a retirement account for the employee. The employee controls how much goes into the account and how the money is invested.

This report shows the average account balances in 401(k) plans broken out by age group (workers in their 20s, 30s, 40s, etc.) and by their tenure with their current employer. What the data shows is how strongly (or not) workers have been committed to saving for retirement over periods of 5, 10, 20, 30 years or longer.

Granted that nowadays, it seems rather rare to find employees who have been with the same company for 30 years or more. But in this report, there are indeed some of those workers who have been loyal to their company for more than 3 decades. You might expect then, that those workers would have some serious cash saved up for retirement, especially those getting close to retirement.

Unfortunately, the data in the report indicates otherwise. For workers in their 60s who had tenures of 30 years or more (very long-term employees), the average 401(k) account balance was about $197,500. Now that’s certainly better than having no savings at all for someone in their 60s on the doorstep of retirement. But $197k is not really a large amount of money to cover up to 20 or 30 years of retirement expenses. In all likelihood, these long-term employees could have done much better jobs as savers.

Consider how that $197k average balance might have come about. Let’s assume an employee made monthly contributions over 30 years and earned a 7% average rate of return overall, probably through a blend of stock and bond mutual funds. Those assumptions would mean that our hypothetical employee would have been contributing about $162 per month since 1979 (30 years ago). Now in 1979, $162 per month would have been a good chunk of change (and it’s still a good chunk of change today, but even more so back then, ey?).

But odds are the employee’s company would have been making some level of contributions, typically as matching money. Just for the sake of argument and round numbers, we’ll assume the company kicked in $42 per month for the employee. That means the employee contributed $120 per month, or $30 per week, year after year. (Are you saving at least $30 per week now? You can start to see where this is going.)

Ideally what happens when you start working as a young person is that you set aside money for retirement through your company’s retirement plan. Even small amounts help when you are just starting work in your 20s. But as the years go by, and (hopefully) as your income rises, the dollar amounts you set aside for retirement grow also. Or at least they should. If they don’t, all you might have to show after 30 years of saving is about $197,000. (And again, that’s way better than nothing. But imagine what it could have been with a little more saving discipline throughout the working years.)

So for any of you who are 30 years or more away from retirement now, let this report—based on real-life results—serve as a wake-up call: if you’re not saving anything for retirement through your company’s retirement plan, get started. If you are saving already (congrats on doing so, by the way), examine how much you are currently putting aside and develop a plan to increase those monthly amounts. Even small annual increases in your savings rate, like an extra 1% per year over a 10-year period, will make a significant difference for your future retirement savings. And with such small incremental changes, you probably won’t notice much difference in your paycheck each year either.

When you reach your retirement years, whether your nest egg is a pleasant or unpleasant surprise depends on what you do now and every year between now and retirement. The long-term employees in this report are no doubt saying to themselves “would have, should have, could have.” If you’re still working, you can. And you should. Will you?


About Mike Wilson

Michael L. Wilson, MBA, CFP®, CRC®, is the owner of Integrity Financial Planning. Prior to founding Integrity in 1998, he worked for two years as a faculty member at the College for Financial Planning in Denver, training other financial advisors. Mike has 10 years of experience in the mutual fund industry, having worked with Fidelity Investments and Invesco Mutual Funds. He holds an MBA in Finance from Baylor University. Learn more about his work at
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