There has been a Wall Street Journal article recently published titled “Companies to Workers: Start Saving More-Or We’ll Do It For You.” Basically the popular percentage that companies start you on your 401(K) plan has been 3% since the 1998 IRS Report, but this number is often much below what is actually necessary. At our age, we must contribute many percentage points above this to reach our retirement goals. The IRS 401(k) contribution limit for 2018 is $18,500 which for someone right out of college is a very high maximum. Personally, I put away 14% of my after tax into a Roth 401(k) and another 14% into my tax deductible 401(k). Since I realize that I am early on in my career and in a lower tax bracket, I split it 50/50 to receive some tax benefits now, and some when I take the money out in 40 years. I recommend investing in low-fee vanguard index funds as these passively managed funds often beat actively managed funds and have fees that do not eat into your investment growth. To check this, usually when you choose investments, there is a link to the prospectus of the fund which will list out of the fees.
Another reason to take advantage of putting more money away into your retirement accounts is to take advantage of the employer match that many companies provide. Often companies match up to either 1/4, 1/2, 3/4 or dollar for dollar up to 6% of your salary put away into your 401(k). Since employees often have their contribution rates left at 3%, they are throwing away free money that they would’ve received if their contribution rate was higher. That being said at the very least, everyone should contribute up to their employer match. This will be 100% profit, which cannot be beat!
By putting this money away before it ever hits my bank account, I don’t miss it and hopefully neither will you. I get used to the after tax income that I receive and create my budget around it. Knowing that by maximizing my contributions early on in my career, gives me confidence in the constant compound growth I should see over time. I realize this may not work for everyone and 28% is a huge number to put away for retirement, but we are young! Many of us have little responsibilities and it only gets harder to save as time goes on. The major road block in building this retirement wealth would be that many of us have student loans to pay off. It would be wise to pay the majority of these off as the interest rates are usually very high, but it is important to put money aside for retirement as well. If it is not possible to do both, I recommend getting used to the student loan payments, and then when everything is paid off, continue the same payment each month toward your retirement. Since you have been used to not having that money, it will not pain you to start saving it. Building a nest egg needs to be on our minds if we are going to enjoy our money in later years. With advances in medicine, our generation is most likely going to live longer than current expectancy, so it is imperative that each one of us has the retirement income we need to survive. We work too hard not to save and invest in our future, so raise your contributions and watch your retirement assets grow, you might thank me later.