NCPA - National Center for Policy Analysis


January 5, 2010

People have a great deal of control over whether or not their retirement will be comfortable.  Millions of Americans are preparing for retirement by saving in tax-favored retirement accounts -- principally Individual Retirement Accounts (IRAs) and employer-sponsored 401(k) plans.  But savers must be aware of common practices that can derail even the best-laid retirement plans, says Pamela Villarreal, a Senior Policy Analyst with the National Center for Policy Analysis.

Young workers may think they have plenty of time to save later, but setting aside a little bit of money on a regular basis throughout one's working years produces a greater nest egg than setting aside a large amount later on.  For instance:

  • A 25-year-old who puts away $100 a month for 40 years at a 7 percent nominal interest rate will have more than $260,000 by age 65.
  • However, if the employee waits until age 45, doubling his contributions to $200 a month will yield a balance of only $104,000 by age 65.

Procrastination can significantly reduce potential retirement savings.  For example, not taking advantage of an employer's matching contributions to a 401(k) account is like turning down a raise:

  • An employee who turns down a dollar-for-dollar 401(k) account match of up to 5 percent of his salary is passing up a 5 percent bonus paid with untaxed dollars.
  • An employee earning $50,000 a year who is eligible for a dollar-for-dollar match of up to 5 percent of salary could receive $2,500 in extra compensation by contributing the maximum amount eligible for the match.

Borrowing against 401(k) savings can seriously reduce future earnings:

  • About 85 percent of 401(k) plans allow employees to borrow against their account balances.
  • The problem with a 401(k) loan is the loss of compound interest and dividends that would have accrued if the money had not been borrowed.
  • An employee with a $50,000 account balance who borrows $25,000 at least 30 years prior to retirement would lose more than $950 per month in retirement income -- for the rest of his life.

Source: Pamela Villarreal, "10 Ways to Wreck Your Retirement," National Center for Policy Analysis, Brief Analysis No. 685, January 5, 2010.

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