Americans are sleepwalking into financial disaster after it emerged that less than half of households had enough cash in their 401k pots.
Feverish inflation has forced young people to put their savings plans on hold — but it could leave them working into their 70s to compensate.
The problem is compounded by stock market turmoil, which caused the average $401,000 fund to drop 20 percent from $130,700 in the fourth quarter of 2021 to $103,900 by the end of last year.
But financial experts insist that even the smallest of changes can transform dreams of retirement.
An analysis by Fidelity International—the largest 401K plan provider in the United States—found that a 35-year-old making $60,000 could earn an extra $85,492 in retirement if they increased their retirement contributions by a modest 1%.
Fidelity International details how increasing your pension contributions by just 1 percent can change your retirement dreams.
In real terms, that could mean saving just an extra $12 per week.
That works out to about two and a half cups of takeaway coffee a week — or ten a month — at an average of $4.90 each, according to data analytics firm NPD.
Meanwhile, a 45-year-old making $70,000 could increase the value of his 401k by $49,925 if he increases his contributions by 1 percent between now and the time he retires.
For those workers, it would require a sacrifice of an additional $14 per week, according to a Fidelity analysis.
The third example provided by the company is a 55-year-old man with a salary of $80,000.
By increasing their contributions by 1 percent — or $16 per week — they could accumulate an extra $16,779 by the time they retire.
The analysis assumes that workers retire at age 67 and benefit from nominal investment growth of 5.5 percent.
“Saving for retirement may seem like a steep mountain to climb, but the climb doesn’t have to be as steep as it sounds,” said Ann Dowd, vice president of Fidelity.
Small steps now can turn into big steps later.
Fidelity found that 29 percent of people are on track to cover all their expenses in retirement, down from 38 percent in 2020.
The majority of American workers rely on an employer-sponsored 401K for their retirement plan.
Roughly 62 percent of American companies offer 401K plans with automatic enrollment policies, according to investment firm Vanguard.
Automatic enrollment means that a small portion of a worker’s paycheck goes directly into their 401k, which is then matched or partially matched by the employer.
The Financial Industry Regulatory Authority says most employers use a default contribution of 3 percent.
But workers are encouraged to increase these contributions – especially as their salaries increase.
And it’s critical that employees start saving as early as possible to give their money more time to grow through compound interest — which is when you earn interest on both the money you set aside to begin with as well as the interest you’ve already accrued.
For example, if you invest $10,000 with an annual return of 10 percent, after one year you will have $11,000. The following year, 10 percent interest is applied to $11,000 in place of the original number.
This means that in ten years the amount of $10,000 will grow to $25,937.
About 11 percent of Americans have never been on track to meet their retirement needs — unless they make significant lifestyle adjustments.
But high inflation – caused in part by Russia’s invasion of Ukraine – has made households less likely to save.
Yesterday it was revealed that 29 percent of Americans are on track to cover all their expenses in retirement, down from 38 percent in 2020.
And it is young people who have borne the brunt of the crisis, with 55 percent of young people between the ages of 18 and 35 saying they have been forced to freeze their savings.
The latest figures reveal that only 28 percent of Millennials and Generation Z-ers — those up to 42 — are on track to cover all of their retirement expenses — compared to 33 percent of baby boomers and 29 percent of Generation X.
Baby boomers are those between the ages of 59 and 77, while Generation X refers to people between the ages of 43 and 58.
Across all generations, 11 percent of Americans have never been on track to meet their retirement needs—unless they make significant lifestyle adjustments.
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