One of the key but often overlooked sources of retirement savings is the 401k plan. These accounts, along with their counterparts the 403(b) plan for non-profits, and 457 deferred compensation plans among others, are often provided by employers as an employee benefit to encourage saving for retirement. In some cases, the employer may offer matching funds or profit-sharing contributions to help employees save for retirement.
However, these plans are often overlooked, especially by younger workers, as they focus on other financial goals rather than retirement. In addition, some plan participants criticize these plans because their contributions limits may not be sufficient to accumulate assets quickly, such as a situation where a worker needs to play catch-up to be able to achieve their retirement goal within their desired time horizon. Yet recent data shows that the 401k can be a valuable tool for retirement savings for those who start early and make consistent contributions, even if the amount of those contributions are limited. A recent report from Fidelity shows that 595,000 people now have over $1 million in their 401k plans. The secret: start early and continue to participate in the plan. The average 401k millionaire is 59 years old and has been participating in the plan for an average of 25 years.
The lesson: start making retirement plan cont-ributions as soon as possible and continue making contributions over time, especially when the markets are performing poorly as those contributions that occur when prices are down often will have an outsized impact on the eventual value of the 401k plan.