Key Points
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One of the most powerful tools for saving money is your employer’s 401(k) plan.
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Most employers offer a matching contribution to entice workers to participate in their 401(k).
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The match is an easy and powerful way to boost your retirement savings.
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Saving for retirement is hard but vital work. It requires deferring spending today so you can spend money at some point in the indefinite future. On top of that, it usually involves risking your money in investments that will fluctuate in value over time.
You need to take advantage of everything you can to boost your retirement savings. Luckily, there’s a simple way to earn an instant, guaranteed return, if you take advantage of it.
What you get from your employer
Most companies offer a retirement plan known as a 401(k). It’s a tax-advantaged account that’s funded with pre-tax money. With this type of plan, you defer paying taxes on the money you contribute until you withdraw your money at a later date (presumably in retirement). It’s then taxed as ordinary income.
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Today, 401(k) plans have largely replaced pensions, so if your company offers a 401(k), you should take advantage of it. A recent report from Vanguard indicates many Americans are doing just that. A full 58% of the 401(k) plans Vanguard oversees have a 90% or higher participation rate. Another 19% have participation rates between 80% and 89%.
That means that nearly 80% of the plans Vanguard administered in 2024 had at least 80% participation from employees. Don’t be one of the few to miss out on the benefits of this retirement account.
|
Vanguard Retirement Plan Participation Rate by Age (2024) |
|
|---|---|
|
<25> |
54% |
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25–34 |
82% |
|
35–44 |
86% |
|
45–54 |
87% |
|
55–64 |
87% |
|
65+ |
79% |
Data source: Vanguard.
The best investment you can make in your 401(k)
Just participating in your employer’s 401(k) is a good start, but there’s a second step you have to consider. No, it’s not deciding which mutual funds or other investments to buy. That’s important too, but first, you need to figure out how much of your income to set aside with each paycheck. That’s known as your deferral or contribution rate.
When you pick a contribution rate (or dollar amount), your employer will automatically pull that amount from your earnings in each pay period and deposit it in your 401(k) account. You don’t need to think about it at all — this part of the savings process will be on autopilot.
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Vanguard Retirement Plan Contribution Rate by Age (2024) |
|
|---|---|
|
<25> |
5.5% |
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25–34 |
6.8% |
|
35–44 |
7.3% |
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45–54 |
7.9% |
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55–64 |
9.3% |
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65+ |
10.1% |
Data source: Vanguard
As you might expect, those further along in their careers and earning higher salaries tend to contribute more than younger workers and those with lower salaries. But there’s a specific figure you should target with your contribution rate — enough to get the employer match.
Most companies offering a 401(k) will also offer to match part of your contributions up to a certain amount (often a percentage of your salary). The median match from Vanguard’s data is 4%.
As the table above highlights, even the youngest savers are putting away enough to get some or all of their employer match, and there’s a good reason for that. The employer match is, effectively, a guaranteed return on your contributions. If your employer offers to match up to 4% of your salary on a dollar-for-dollar basis, your 4% in contributions will double to 8%. That’s an incredible rate of return before you even start investing the money.
It’s easy and automatic
The interesting thing about collecting the match is that it’s something you can set up just once and forget about it. Just make sure you ask about the match when you join your company’s 401(k) plan to understand the specifics.
Once you have that information, save at least enough to get the employer match, though hopefully more. And like magic, you’ll be supercharging your retirement savings through a simple, automated process every time you get paid.
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