Since their introduction in the early 80s, 401(k) plans have become a primary source of retirement savings for many Americans. These tax-sheltered accounts allow workers to set aside a portion of their paychecks to be invested in a variety of stocks and bonds as well as have their employer match a part of their contributions and perhaps offer profit sharing. Given the many benefits 401(k)s offer, it’s even more concerning that a good portion of adults don’t currently have one and aren’t eligible for one.
As CNBC reports, a recent Pew study has found that 35% of private sector workers over the age of 22 aren’t currently offered an employer-sponsored 401(k) plan. That figure is even higher among younger workers with 41% of Millennials noting that they don’t qualify for their employer’s 401(k) or that they work for a company that doesn’t offer them at all. However the study also found that younger adults are less luckily to opt into 401(k) plans even when they are available. While three-quarters of Gen Xers and 80% of Baby Boomers take advantage of their provided 401(k)s, barely half (52%) of Millennials do the same.
The real shame in that statistic is that youthful workers actually have the most to gain from 401(k)s as starting their retirement savings early can significantly increase the funds they have available at a later age. For example, saving $200 a month in a retirement account with a 6% rate of return starting at age 25 results in $402,492 at age 65 — nearly double what someone saving the same amount from age 35 to 65 would have. Yet 20-somethings might not be as inclined to start saving right away as they work to pay off student debt and make other financial arrangements. From there, few ever make the switch to starting their retirement savings. As financial expert Kimmie Greene told CNBC, “The choices don’t get easier as your salary increases. It’s part of the mindset when you’re young. It’s ‘Oh, when I get that next job and I get a $10,000 bump in my salary, then I’ll start doing these things,’ but that’s really not the reality.”
Of course it isn’t just Millennials who are failing to prepare for retirement. Another study by GOBankingRates discovered that 42% of Americans had less than $10,000 saved up for their post-work lives. The bottom line is that those fortunate enough to be offered 401(k) plans through their employers should make every effort to take advantage of these offers. Meanwhile, while they may hold far lower contribution limits than 401(k)s, individual retirement accounts (IRAs) provide the same tax-sheltered status as 401(k)s but also give account holders more options for investing their money. Whether you choose one of these options or others — including Roth IRAs or Solo 401(k)s — the important thing is start savings as much as you can for retirement as soon as you can.