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Investing Basics: Saving for Retirement with a 401(k) Plan

By Christina Kilroy

September 9, 2020

As part of the ICI Education Foundation’s 30th anniversary celebration, we are sharing a series of ICI Viewpoints posts explaining basic investing concepts, drawn from the ICI Education Foundation’s Investing Road Trip.

When I first moved to the Washington, DC, area, I got lost constantly. I was accustomed to looking for green road signs for directional guidance. Those brown recreational signs? I pretty much ignored them. But in and around Washington, the National Park Service manages more than 265 miles of roadway where brown signs contain important information for drivers—like, say, the exit to the airport.

Similarly, the ICI Education Foundation’s Investing Road Trip contains road signs with basics for investors meant to point the way to investing success, and the journey ends at retirement, depicted with idyllic images of a park bench and a golf cart. But what if, in real life, you don’t quite follow this tidy path? Even for workers who get a late start, hit some bumps, and take a few detours, saving for retirement is still possible.

More than 58 million active 401(k) participants and millions of former employees and retirees hold $5.6 trillion in assets in 401(k) plans. Employers offer 401(k) and other similar plans to attract talented workers and to provide them a valuable benefit—but employees still must be sure to make the most of that benefit. Here are guideposts to get you started, maintain your progress, and make the most of your 401(k) as you journey to retirement.

Just Getting Started or Starting a New Job

As the saying goes, a journey of a thousand miles begins with a single step. That first step, if you have a 401(k) plan available to you, is to make sure you’re enrolled in it. Some employers automatically enroll employees in 401(k) plans, selecting a default initial contribution rate and a default investment, unless the employee indicates otherwise.

If you’re not enrolled automatically, you’ll have to opt in and choose how much you want to contribute and how you want your contributions to be invested. You can build your own portfolio from the investment options available in your plan (on average, 401(k) plans offer 28 investment options) and adjust your portfolio over time to maintain an appropriate, diversified mix of assets.

If picking your own investments seems daunting, more than three-quarters of 401(k) plans offer target date funds among the investment options, which can simplify portfolio building. Each target date fund holds a diversified mix of stocks and bonds that is automatically rebalanced depending on the target date, which is usually your expected retirement year.

Balancing Competing Financial Demands

Saving for a far-off goal such as retirement can be challenging, especially when near-term obligations are pressing. But even when balancing saving for major financial goals—such as college costs or a home purchase—with retirement, you should at least try to contribute enough to your 401(k) plan to maximize your workplace benefits.

Employers contribute to workers’ 401(k) accounts in eight out of 10 plans, and often base their contributions on how much the employee contributes. The formulas for these contributions vary by employer, but the most common approach is a simple match, where the employer matches a certain percentage of employee contributions up to a maximum percentage of employee salary. Not maxing out the match is leaving money on the table—money that is a valuable part of your employee benefit. Review your contribution rate to make sure you are at least taking full advantage of any match your employer offers.

Depending on your situation, you may want to go beyond maxing out the employer match to save even more.

Experiencing Financial Hardship

The best thing to do during challenging times, if you’re able, is to stay the course—and most retirement savers do. Despite the economic stresses brought about by the COVID-19 pandemic, only 2.0 percent of participants in 401(k) and 401(k)-style defined contribution plans stopped contributing to their plans in the first half of 2020, according to recent ICI research. The most important thing to remember, if you do have to pause your 401(k) contributions, is that you start contributing again when you are able.

Changing Jobs

When leaving a job, avoid the temptation to cash out of your employer plan, even if your account balance is small. Research has shown that younger workers are more likely to withdraw small account balances, even though they have the most to lose by missing out on the future returns of those assets. Plus, if you do cash out, you could be hit with tax penalties.

So how do you maintain your savings—and the tax advantages of your workplace plan—when switching jobs? You’ll likely have three options available: roll the money over to an individual retirement account (IRA), move it to a new employer’s plan, or possibly keep it in your old employer’s plan. IRA rollovers are especially appealing to those who want to consolidate their assets as they progress through their careers, rather than leave them behind in a series of former employer plans.

Getting a Late Start

Even if you start saving for retirement later than you may have liked, all is not lost. While you may not have time to enjoy the full magic of compounding, the IRS does offer help to older workers by allowing for catch-up contributions. Savers aged 50 and older may make additional catch-up contributions of $6,500 to their 401(k) or similar plans, on top of annual deferral limits of $19,500 for tax year 2020. With this provision, workers who are ready to make retirement saving a priority can go a long way to prepare in the run-up to retirement.

After a lot of U-turns, I finally learned to pay attention to the road signs here in Washington. I hope that the road signs in this series and in the Investing Road Trip offer helpful guidance, wherever you are in your journey of saving and investing.

Other Posts in the Investing Basics Series

  • What Is Investing?
  • What Is Risk?
  • Types of Investments
  • Diversification
  • Dollar-Cost Averaging
  • Benefits of Mutual Funds
  • Tax Benefits to Encourage Saving
  • 529 Savings Plans
  • Compound Returns and the Power of Reinvestment
  • Understanding Fees and Expenses
  • Saving for Retirement on Your Own
  • Saving for Retirement with a 401(k) Plan

Christina Kilroy is vice president of the ICI Education Foundation.

Permalink: https://www.ici.org/viewpoints/20_view_icief12

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Investing Basics: Saving for Retirement on Your Own

By Christina Kilroy

August 31, 2020

A majority of workers aged 26 to 64 were active participants in a workplace retirement plan in 2017, according to ICI’s most recent tabulation of tax data. But what if you don’t have access to a workplace retirement plan? You still have great options to save for retirement with similar advantages to the 401(k). Learn more in the latest installment of ICI Education Foundation’s investing basics series.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Congress Should Give Americans Flexibility to Keep Retirement Savings on Track

By Paul Schott Stevens

July 31, 2020

As policymakers take further steps to assist families and businesses weathering the storm, Congress can help American families get their retirement savings goals back on track by including the “Temporary Coronavirus-Related Catch-Up Contribution” proposal in the next COVID-19 relief package.

Read more…

TOPICS: 401(k)Government AffairsIRAMutual FundRetirement PolicyShareholder

Investing Basics: Understanding Fees and Expenses

By Christina Kilroy

July 30, 2020

In the ICI Education Foundation’s Investing Road Trip exhibit, a toll booth illustrates the fees and expenses that are part of investing. Every vehicle on a toll road pays and some of that money helps to maintain the road, which ultimately makes for a smoother and safer trip for everybody. Likewise, every investor pays a cost to invest but receives professional management and services in return.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

IRA Investors Are Concentrated in Lower-Cost Mutual Funds

By James Duvall

July 30, 2020

Individual retirement accounts (IRAs) represent the largest share of assets in the US retirement market, with assets totaling $11.0 trillion at year-end 2019. As part of an ongoing effort to shed light on important insights into IRA investing, ICI is updating its analysis of expense ratios that investors pay on mutual funds in their IRAs.

Read more…

TOPICS: 401(k)Bond FundEquity InvestingIRAMutual FundRetirement ResearchShareholder

Investing Basics: Compound Returns and the Power of Reinvestment

By Christina Kilroy

June 29, 2020

Start saving early. You’ve heard it once, you’ve heard it a million times. There are a few reasons why that’s a good idea—to get in the habit, to manage risks to your investments and income, and to allow more time to contribute to your savings and let them grow. But the strongest case for starting early boils down to one phrase: compound returns.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Tax Filing Deadline Extended to July 15: What It Means for IRA Savers

By Christina Kilroy

June 18, 2020

On March 21, 2020, the Treasury Department and Internal Revenue Service (IRS) extended the federal income tax filing due date—also known as Tax Day—for the 2019 tax year. Workers now have until July 15 to prepare their 2019 tax returns, as well as more time to consider options to potentially reduce taxable earnings. One of the easiest and most popular ways to reduce taxable earnings is contributing to an individual retirement account (IRA).

Read more…

TOPICS: IRAInvestment EducationRetirement ResearchSavingsTaxes

The US Retirement System Is Stronger Than Critics Portray

By Paul Schott Stevens

May 18, 2020

A recent Washington Post opinion piece paints an inaccurate and misleading picture of the US retirement system by misusing data and making false assumptions. The retirement system is far stronger than portrayed.

Read more…

TOPICS: 401(k)IRARetirement Research

Investing Basics: 529 Savings Plans

By Christina Kilroy

May 7, 2020

One thing you can expect when you’re expecting a baby is to pay a lot for diapers—you might pay about $600 by your child’s first birthday. But the cost of diapers is child’s play compared to the costs that could come later when paying for college. 

To encourage people to save for these education costs, nearly every state and the District of Columbia offer 529 plans, and most offer special tax treatment for savers participating in those plans.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Investing Basics: Tax Benefits to Encourage Saving

By Christina Kilroy

April 14, 2020

To encourage people to save, federal and state governments offer special tax treatment for savings plans for specific goals, such as retirement and education. By increasing the benefit that savers receive in the short term, the government nudges savers to take a positive action that will provide a benefit in the long term.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Investing Basics: The Benefits of Mutual Funds

By Christina Kilroy

March 31, 2020

We’ve reached the halfway point in this series, and we’ve covered a lot of ground: the benefits of investing, how to think about risk, different types of investments, why diversification is important, and dollar-cost averaging. This month’s installment brings all these topics together and examines seven features of mutual funds that make them an enduringly popular investment choice.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Investing Basics: Dollar-Cost Averaging

By Christina Kilroy

February 27, 2020

Emotions are the enemy of successful investing. For long-term investors, dollar-cost averaging is a smart way to take the emotion out of investing and to eliminate the difficulty and uncertainty of trying to time the market.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Investing Basics: Diversification

By Christina Kilroy

January 30, 2020

Eggs play a starring role in diversification’s ubiquitous analogy—one we used in the Investing Road Trip©—and for good reason. If you drop a basket holding all your eggs, you’ll be out a lot of eggs. Spreading your eggs across several baskets is a good defense against the risks of exposing all your assets to the same risk.

But perhaps we should also make the point that eggs shouldn’t be the only food in your basket. They may be high in protein, but your body needs a mix of nutrients for good health. Similarly, with investing, a better goal is to build a balanced “diet” of asset classes across industries, geographic areas, and types of securities....

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Investing Basics: Types of Investments

By Christina Kilroy

December 23, 2019

Two of the most common investments are stocks and bonds. Chances are if you own a portfolio of investments, those two types of assets make up a significant part—or perhaps all—of it. For those who want to start investing, it’s essential to understand these common portfolio building blocks...

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Talkin’ ’Bout the Generations: ICI Research on Mutual Fund Ownership by Generation

By Michael Bogdan and Candice Gullett

December 11, 2019

Talk about the differences between generations is a hot topic in today’s cultural conversation. And the Millennial and Baby Boomer generations are in the middle of a little generational warfare. But when it comes to owning mutual funds, are there really that many differences? 

Read more…

TOPICS: 401(k)Equity FundEquity InvestingIRAInvestor ResearchMoney Market FundsRetirement ResearchSavings

Investing Basics: What Is Risk?

By Christina Kilroy

November 26, 2019

You invest with the hope of earning a return on your investment. That opportunity invariably involves risk, including the possibility of losing some or all of the money you invested. Understanding these risks is an essential step toward successful investing.

The second installment of the ICI Education Foundation's blog series celebrating its 30th anniversary explores different types of investing risks.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Investing Basics: What Is Investing?

By Christina Kilroy

October 31, 2019

This month, the ICI Education Foundation celebrates 30 years of developing, delivering, and promoting investor education. As part of our yearlong celebration, we will be sharing an ICI Viewpoints post each month that explains a basic concept of investing, drawn from the ICI Education Foundation’s Investing Road Trip.

Read more…

TOPICS: 401(k)Exchange-Traded FundsIRAInvestment EducationMutual FundSavingsShareholder

Happy Birthday, IRA! Congratulations on 45 Years

By Sarah Holden and Elena Barone Chism

September 12, 2019

Labor Day 2019 marked the 45th birthday of the individual retirement account (IRA). When the Employee Retirement Income Security Act was signed into law on September 2, 1974, it introduced bold steps to safeguard Americans’ employer-sponsored pensions and created the IRA.

Forty-five years later, IRAs are a significant component of US households’ retirement assets, holding $9.4 trillion in assets, or about one-third of the total US retirement market, at the end of March 2019…

Read more…

TOPICS: IRAInvestor ResearchMutual FundRetirement ResearchSavingsShareholder

30 Tips to Celebrate 30 Years of Investor Education

By Christina Kilroy

September 3, 2019

For 30 years, the ICI Education Foundation has pursued its mission to advance investor education by developing, delivering, and promoting investor education to diverse audiences across a range of ages and life stages. As we kick off our celebration of the foundation’s 30th anniversary in October, we will be sharing tips for successful investing on our social media accounts over the coming weeks....

Read more…

TOPICS: 401(k)IRAInvestment EducationMutual FundSavingsTaxes

Critics Claim Retirement Savers Aren’t Behaving Rationally. The Data Say They Are.

By Peter Brady

August 22, 2019

In a letter to MarketWatch responding to “Opinion: This Recent Report Suggests Steady Saving for Retirement Is Not Important,” published August 14, ICI Senior Economic Adviser Peter Brady refutes claims that criticize ICI’s recent retirement research, noting that more people benefit from employer plans than is commonly understood….

Read more…

TOPICS: 401(k)IRARetirement PolicyRetirement Research

IRA Investors Are Concentrated in Lower-Cost Mutual Funds

By James Duvall

August 20, 2019

Individual retirement accounts (IRAs) represent the largest share of assets in the US retirement market, with assets totaling $8.7 trillion at year-end 2018. Forty-six percent of this total is held in mutual funds, with IRA mutual fund investors primarily invested in equity funds. As part of ICI’s ongoing efforts to shed light on important insights into IRA investing, ICI is updating its analysis of expense ratios that investors pay on mutual funds in their IRAs....

Read more…

TOPICS: 401(k)Bond FundEquity InvestingIRAMutual FundRetirement ResearchShareholder

Mind the Gap

By Sarah Holden and Christina Kilroy

July 22, 2019

It’s a good idea to “mind the gap” if you’re traveling on the Tube in London, taking Amtrak in the United States, or riding Metro in Paris or Washington, DC. Being mindful of the space between where you are and where you’re going is important—not only when navigating public transit, but also when saving for retirement. Saving for retirement is a career-long process, with many decisions along the way....

Read more…

TOPICS: 401(k)IRAInvestment EducationMutual FundRetirement ResearchSavingsShareholderTaxes

ICI’s Quarterly Retirement Market Resource

By Miriam Bridges

April 23, 2019

ICI publishes statistics on the US retirement market every quarter as an information resource for mutual funds, individual investors, the media, policymakers, and researchers. This report includes individual retirement account (IRA) and defined contribution (DC) plan assets, including 401(k) plans, and mutual fund assets held in retirement accounts....

Read more…

TOPICS: 401(k)IRAMutual FundRetirement ResearchSavings

IRA: Will You Be Mine?

By Sarah Holden

February 12, 2019

As this Valentine’s Day approaches, step back and consider treating yourself or your spouse to an individual retirement account (IRA) contribution. Saving for retirement is an important household financial goal and contributing to an IRA is a good step toward providing for those later years....

Read more…

TOPICS: IRARetirement Research

IRA Investors Are Concentrated in Lower-Cost Mutual Funds

By James Duvall

August 8, 2018

Individual retirement accounts (IRAs) represent the largest share of assets in the US retirement market, with assets totaling $9.2 trillion at year-end 2017. Forty-seven percent of this total is held in mutual funds, with IRA mutual fund investors primarily invested in equity funds. As part of ICI’s ongoing efforts to shed light on important insights into IRA investing, ICI is offering an updated analysis of expense ratios that investors pay on mutual funds in their IRAs....

Read more…

TOPICS: 401(k)Bond FundEquity InvestingIRAMutual FundRetirement ResearchShareholder

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