More than half (51%) of Americans aren’t actively contributing to an employer-sponsored 401(k) account, according to a new study from financial services firm Edward Jones.
And even less are saving in other accounts—only 37% to an individual retirement account, or IRA, and only 18% to a health savings account, or HSA.
That’s rough news at a time when surveys frequently trumpet Americans’ lack of retirement readiness in general.
“I have had clients come to me with nothing saved for retirement,” says William Brancaccio, a financial planner in White Plains, NY.
“Our society heavily revolves around instant gratification. Deferred gratification is rarely emphasized, and retirement saving is all deferred gratification.”
Why aren’t people saving?
They don’t have the money. “I think the 51% of the Americans that are not saving may be, for the most part, the individuals that don’t necessarily have the discretionary funds to direct into their 401(k), and thus are challenged to do so,” says Michael H. Smith, a financial planner in Riverside, IL.
They have other goals. “My clients are mostly families with young children, and they are typically not saving, or not saving enough for retirement, because they have so many other pressing needs—daycare costs, getting cars big enough for the car seats, wanting to buy a house, etc.,” says Linda Rogers, a financial planner in Memphis, TN.
They think they have more time. “Younger Americans, in particular, sometimes have the mindset that they will be able to contribute to a retirement plan more easily when they are older and are making more money,” says Sarah Graham, a financial planner in Vienna, VA. “This is a dangerous approach to take. They miss out on all the ‘free’ money their employer would have match, they miss out on the growth over the years, and there is no guarantee that they will be any more financially able to contribute later in life.”
They thought it was a short-term gig. “The number one reason I hear when I ask why a participant is not saving in the 401(k) plan is, ‘I did not think I would be here this long,’” says Daniel Lash, a financial planner in Vienna, VA. “They thought the job would only last a short period of time, and hence, they did not sign up for the 401(k) plan.”
They may not have the option. There are a number of employees who work for smaller companies that don’t offer a 401(k), or they work in the gig economy, so they’re contracted by companies as consultants for short-term assignments. “They are not employees, and they do not receive benefits such as a 401(k),” says Edward Snyder, a financial planner in Carmel, IN.
They’d rather spend the cash. “The hurdle is that people want the money now,” says Ashley Foster, a financial planner in Houston, TX. “Retirement feels so far away, yet paying the bills is a current obligation. This is true with my younger Gen Y clients.”
How do you get non-savers to save?
Pair them with a financial advisor. Sometimes it takes an outside professional to break the inertia. “I find many people are overwhelmed by money and the idea of talking about the future,” says Stephanie Mushna, a financial planner in Grand Rapids, MI. “It often times is on a client’s list of ‘I’ll get to it tomorrow.’ One of the huge benefits of working with a financial advisor is that it allows a personal financial plan to be drafted.”
Give them a visual. “Last semester, when I showed my students how much a one-time $5,500 Roth IRA contribution would grow after 45 years, assuming a 10% growth rate, a student looked at me with a skeptical look on his face and asked, ‘If this is true, why doesn’t everyone invest?’” says Patrick Lach, a financial planner in Louisville, KY and an associate professor of finance at Bellarmine University. “I think if more people knew how much more they could earn by saving early, more people would save.”
Explain the “free money” concept. “I ask them, if someone offered to just hand them money, would they refuse?” Smith says. “Then I explain that that is what they are doing when they don’t at least contribute to their 401(k) up to the employer match.”
Encourage them not to stop at the match. “We keep seeing younger workers only contribute to the match,” says Elizabeth Miller, a financial planner in Summit, NJ. “Yes, it is the best investment return they will ever have on their money, but then they stop increasing their contributions each year.”
Start small. “I generally have clients start off with a percentage that won’t change their world,” Brancaccio says. “We start with 1% to 2% and gradually, throughout the year or years, increase up to 5% to 8%.” Ideally, people should eventually be saving 10% to 15% of their salary each year—or more if they're closer to retirement.
Emphasize prioritizing savings. “To start saving, you need to get in the habit of paying yourself first, like a bill,” Snyder says. “Instead of paying your bills and then trying to save what’s left, commit to an amount to go into your 401(k) and save it first, then pay bills and live on what’s left. It’s mostly just about getting into the habit.” For those who don’t have access to a 401(k), that money might go automatically to an IRA or a self-employed 401(k). The key is to get started.