Retirement | November 22, 2019

Auto-Enrolled in Your 401(k)? Make Sure You’re Saving Enough

According to research from the Pew Charitable Trusts, companies that auto-enroll employees in workplace retirement plans such as 401(k)s have participation rates that exceed 90%—well above the 50% for opt-in plans.

Unfortunately, many savers leave their contributions set at the default rate, which averages just 3.4% nationwide. That’s substantially lower than the amount workers need to contribute to receive the maximum company match, which averages 5.1% nationwide.1 “And even that is about half what workers should be socking away each year to adequately fund their retirement,” says Mark Riepe, senior vice president at the Schwab Center for Financial Research.

For example, imagine someone who makes $80,000 per year, contributes 3.4% to her 401(k) and receives an equal amount from the employer’s match, and earns 6% annual returns. After 30 years, she would have saved $457,657. Increasing her contribution—and therefore the employer’s match—to 5.1% would boost the total portfolio value by 50%,2 to $686,486.

However, even saving enough to get the full company match might not be adequate, Mark cautions. For example, someone who expects to withdraw $40,000 in the first year of a 30-year retirement—and then increase their withdrawals annually to account for inflation—should aim to amass a portfolio of about $1 million if they want to be highly confident their money will last. “That’s why we advise saving at least 10% of your annual pay, to give you more cushion,” he says. “That may mean making small compromises now, but it will help you avoid making big compromises down the road.”

1Barbara A. Butrica and Nadia S. Karamcheva, “How Does 401(k) Auto-Enrollment Relate to the Employer Match and Total Compensation?” Center for Retirement Research at Boston College, 10/2013. | 2The examples are hypothetical and for illustrative purposes only. Contributions are made at the beginning of each month, and annual returns are compounded monthly. Actual rates of return will fluctuate with market conditions. Examples do not reflect the effects of taxes and fees; if they did, returns could be lower.