Benefit Of Boosting Your 401(k) Contribution


Plenty of data are generated on 401(k) retirement plans, and some of them are even useful.

Take the size of the average contribution to accounts. It was 7% in plans run by Vanguard Group as of Dec. 31. And the most common company match: 6% in plans surveyed by human resources consultant Aon Hewitt. Vanguard and Aon are among the top plan operators.

So how can those figures boost your retirement nest egg ?

Well, take that average contribution rate of 7%. If you are kicking less into your account, ask yourself why. OK, not enough money. That's a good one.

But if that's too low to put you on track for a comfortable retirement, you can either be satisfied with that and trust luck to put you back on the right path, or you can start looking for ways to bump up your savings.

As a starting point in your retirement planning, you should aim for at least the average.

If you want to be more specific, estimate how much money you'll need at retirement. Then see if your contribution rate will get you there, says Rob Austin, a senior consultant at Aon Hewitt.

You can determine the target size of your nest egg at retirement with calculators that crunch the numbers. Or you can use a handy rule of thumb. Aon Hewitt has one.

"Let's say you're contributing 10% of your pay to retirement," Austin said. "That means at retirement, to maintain your current standard of living, you only need 90% of your current salary."

Aon Hewitt says that to do that, your nest egg must be 11 times your ending pay. That assumes your income is augmented by Social Security benefits, but no other sources of income, and you retire at 65.

An account that size should last through an average life span, which is 87 for men and 88 for women.

Are You On Track?

How can you tell if you're on track? At age 45 your account should be four times your pay. At age 35, it should be 1.75 times. The later you start or the less you put in, the higher those multiples must be.

Tweaking your rate of contribution can have a huge impact on the size of your account by retirement. Be sure to factor in the size of any company match.

Look what happens if you start to save 3% of your pay at age 21. Suppose you're earning $40,000, and you get raises averaging 1.5% a year. Imagine that your company matches every dollar you contribute up to 6% of your pay.

Finally, let's say the annual rate of return on the investments in your account is 7%. Your nest egg would have about $831,000 by age 65.

If you save 6% of your pay from the get-go, you double your company match. Your balance at age 65: $1.66 million.

And if you pony up that 7% average rate? You end up with $1.8 million, a cool extra $140,000.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Mutual Funds

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