Money Talk: Not contributing to your company’s 401 (k)?

By Rodney A. Brooks

One of Americas’ biggest fears is that they will run out of money in retirement – with good reason. Most of us have not saved enough for retirement. And the pandemic made things even worse.

According to the Anytime Estimate Retirement Finances Survey, the financial stress resulting from the pandemic caused many people to either spend retirement savings or stop saving for retirement altogether. Median retirement savings were only $71,000, but more troubling was that 27 percent of Americans have less than $50,000 saved for retirement and 16 percent have nothing saved.

Black Americans, meanwhile, often don’t participate in retirement accounts. Only 44% of Black Americans have retirement savings accounts, with a typical balance of around $20,000, compared to 65% of white Americans, who have an average balance of $50,000, according to the Federal Reserve.

That’s one of the reasons so many Black seniors are dependent on Social Security for a large portion of their retirement income. That’s worrisome since the average Social Security check is only $1,542.

So, if you aren’t contributing to your company-sponsored 401(k) retirement plan, you are making a big mistake. And on top of that, you are passing up free money, and the tax advantages that come with your contributions.

Commonly the match works like this: Your employer contributes 50 cents for each dollar you contribute to your 401(k), up to 6 percent of your salary. Some employees offer matches of 5 percent, or even more. But, if you aren’t contributing to your 401(k) (or your 403(b) if you’re an educator or work at a non-profit), you don’t qualify for a match.

One financial planner had a client who was earning a six-figure salary at a company that had a large match. But she was only contributing two percent of her salary and thus losing out on thousands of dollars a year in both free money and the potential growth in her accounts.

Most financial planners suggest you save 10 to 15 percent of your salary. But people often put off retirement savings because life gets in the way – marriage, buying a car, buying a home and having children.

Still, it’s important that you find a way.

The first step is to begin contributions. If your employer offers a 3 percent match, then you should contribute at least that much. You probably won’t even notice the deduction from your contributions. And those contributions will reduce your tax liability.

Consider auto escalations. If your plan allows it, you can automatically increase your contributions every year. Say you start out contributing 3 percent. That could increase to 4 percent next year and 5 percent the following year. Because it automatically increases, you don’t need to do anything, and you will be dramatically increasing your retirement preparedness.

Invest in mutual funds. Black Americans tend to be super conservative investors, for various reasons. But you should make sure you are invested in the stock market (with mutual funds). The market offers better long-term growth than any other investment.

If you don’t know what to invest in, get help from a financial advisor.

Increase your contribution to your 401(k) when your pay increases. It’s an easy and painless way to increase your contribution. When you get that 5 percent pay raise, increase your contribution by 1 or 2 percent. You won’t miss it because it is new money. Again, it will make a big difference over time.

Do not use your 401(k) as a piggy bank. Avoid withdrawals. If you are under 62 you will pay both taxes and a 10 percent early withdrawal penalty. Additionally, you will lose the precious growth of your portfolio. Most plans offer the option to take loans on your accounts. Take loans only in emergencies or when you have to. Often people take loans to make a down payment on a home. But otherwise, leave your money alone and let it grow.

Rodney A. Brooks is a Texas Metro News Columnist and Senior Fellow at Prosperity Now. The author of Fixing the Racial Wealth Gap: Racism and discrimination put us here, but this is how we can save future generations, he has written for USA TODAY, The Washington Post and National Geographic.