Americans like their 401(k)s, but can be pretty clueless about how to use them to maximum effect—leaving them less-than-well-prepared for retirement.
Findings from a survey from the Guardian Insurance & Annuity Co. Inc. included this and other unsettling news, such as how few Americans understand some of the basic terms needed to use a 401(k) efficiently and how few understand how to get the most from their plans.
The "Guardian Small Plan 401(k) RetireWell Study SM2.0: What's Working and Not Working for Small Plan Participants" revealed that, while 50 percent of respondents said they'd heard of target-date funds, 45 percent had heard of dollar cost averaging and 39 percent were familiar with target risk funds; while 66 percent of those claiming familiarity with target-date or target risk funds didn't really know what those terms meant. In addition, 77 percent say they've heard of vesting, but fewer than half understand what vesting is.
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Considering that 77 percent of respondents said that their 401(k)s were going to be their most important source of income during retirement—the cash cow they're fattening for retirement, and from which they intend to milk the bulk of their retirement income—that's pretty scary. (Social Security came in second to 401(k)s, while personal savings came in third—and we all know what the savings rate has been like in this country for some years now.)
Then there's the way people use their 401(k)s. On average, participants younger than 50 put away just $8,700 annually in their plans, while those 50 and older average $9,100. That comes out to a median deferral rate of 9 percent of personal income, which might sound like a lot, but it's way less than what most financial professionals recommend.
People also routinely fail to increase their 401(k) contributions every year—a third don't touch them at all—and that means they're paying more taxes on income than they need to, and also might be leaving company matching funds on the table. And they spend more time checking their balances than focusing on how those balances can be turned into income. Just 50 percent say they're "somewhat confident" they'll actually achieve their target retirement income.
The study concludes that if they knew more, they'd probably save more.
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