Education Center » Are you contributing enough to your 401(k)?

Are you contributing enough to your 401(k)?

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Now might be a good time to take a look at how much you’re putting in your retirement account. Here’s why adding to it—if possible—could benefit you over the long haul.

You’ve already made a wise decision to participate in a 401(k) plan. You might be thinking that you are in good shape and have a long-term investing strategy in place. But here’s an important question: Are you contributing as much as you can?

Stuck in the default zone

After choosing to enroll, your contribution rate is your next important decision. If your company offers an automatic enrollment feature, you may have been defaulted to a pre-set contribution rate. And you might be stuck at that default rate.

Even if you enrolled in your 401(k) plan on your own and chose your contribution rate, have you checked it lately? It’s always a good idea to review your situation and determine whether you can bump up your contributions. Take a look at the illustration below, which shows the potential assets of an employee making $50,000 annually who contributes either 3% or 6%.

How contribution rate affects your 401(k) growth potential

Assumes $50,000 annual salary and 6% annual rate of return.


The hypothetical illustration above assumes a salary of $50,000 and contribution rates of 3% and 6%, with contributions made at the beginning of the month and 6% annual effective rate of return. Hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate and when redeemed the investments may be worth more or less than their original cost. Taxes are due upon withdrawal. If you take a withdrawal prior to age 59½, you may also be subject to a 10% additional federal tax.

Meet your match

Some employers match a portion of your contributions. It’s a great benefit, so you’ll want to check if your employer offers one. If they do, consider contributing at least enough to get the full match. If you can go above and beyond your employer’s match limit, more power to you!

Compounding is a beautiful thing

Another way to see the potential impact of increasing your contributions is to understand the concept of compounding. What does it mean? Basically, compounding is when any earnings—from your 401(k) account or another source are automatically reinvested, allowing you to potentially generate more earnings over time. It’s kind of like a snowball effect. By contributing as much as you can, automatically reinvesting any earnings and avoiding taking loans from your vested balance, you can potentially increase your chances of helping you meet your goals.

Consider this: Contributing just $100 per month ($1,200 per year) in your plan comes to just $3.33 per day. And to increase your contribution to $200 per month ($2,400 per year), the cost is less than $7 per day—and could potentially result in an account worth more than $180,000!

The power of compounding

Assumes 25 years of monthly contributions (age 25–50).


The hypothetical illustration above assumes contributions are made at the beginning of the month and a 6% annual effective rate of return. Hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate and when redeemed the investments may be worth more or less than their original cost. Taxes are due upon withdrawal. If you take a withdrawal prior to age 59½, you may also be subject to a 10% additional federal tax.

Juggling other priorities

It’s one thing to understand how increasing your contributions can have an impact over time, as well as the concept of compounding. It’s another to find the money to increase your contribution rate when you have bills to pay today. But small changes in your spending habits can make saving a little more for the future possible. Consider these ideas:

Curb your impulses — We’re all guilty of impulse shopping. Rather than buying on a whim, take the time to look for sales and online deals and shop with apps and coupons. You’d be surprised how much it’s possible to save.

Cook at home — Do you stop for a cup of gourmet coffee on your way to work, or buy your lunch every day? Try making your coffee and lunch at home and saving those few dollars. They can really make a difference.

Keep your tax refund — Are you expecting a tax refund this year? Has your tax bill gone down due to recent tax law changes? If so, consider putting the difference into your retirement plan.

A few stray dollars here and there may not seem like much. But week after week, month after month, they can really add up. And remember, making contributions to your 401(k) plan on a pre-tax basis could lower your taxable income. That’s because your contributions are made before federal (and, in some cases, state) income taxes are deducted.

Learn more and take action

  • Ready to act now? If your company’s 401(k) plan is through Merrill Lynch, you can increase your contribution rate today on Benefits OnLine®.
  • Watch this short video to see how starting early could impact your 401(k) account balance over time.
 
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Neither Merrill Lynch nor any of its affiliates or financial advisors provides legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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