But, skipping even one year of your pension contributions could have a significant impact on how much you can retire on or how early you are able to retire.
Around two-thirds of workers are considering reducing or halting payments towards their 401k’s, which have already taken a hit following the COVID pandemic.
A quarter of Americans have also only saved between $10,000 and $50,000 in their retirement funds, according to data from GOBankingRates, sparking concern for the financial stability of future retirees.
The risks of delaying payments into your 401k could be severe, depending on your current financial circumstances and how long you put a hold on your payments for.
If you put off saving for too long or you only contribute money infrequently, you run the risk of retiring without enough to support you in your later years.
According to a recent Anytime Estimate survey, around a third of workers are currently not contributing enough to their pensions, reporting that they are simply not earning enough to make the essential contributions.
Meanwhile, one in five said they felt too young to start contributing to their pensions, potentially missing out on thousands of dollars.
How Much Do You Need to Save to Retire?
How much you need for your income ultimately depends on the lifestyle you aim to have after you stop working and how much you are able to save throughout your career.
However, most retirement experts advise that to retire comfortably, you ideally need at least 80 percent saved up for when you decided to give up working.
This means if you retire with a previous salary of $50,000 you ideally need to have saved $40,000 in your 401k to maintain the lifestyle costs you had before you stopped working.
The U.S. Census Bureau data shows that the median retirement income for retirees 65 and older is $46,360 per year in 2020, and with the Bureau of Labor Statistics , the median salary currently standing at around $54,132 per year, the average retiree should have enough to see them through.
What Happens If I Miss or Delay a Pension Payment?
Ultimately, it’s up to you to ensure you are saving as much as you can towards your pension, but how much you are able to save can vary – and taking a break when you need it isn’t necessarily something to worry about.
Experts at Fidelity recommend aiming to save at least 15 percent of your pre-tax income per year to retire comfortably.
If you have a $50,000 salary for 40 years, saving 15 percent of your income each month, you should be able to accrue a pension pot worth around $324,800, or around $18,000 per year for an 18 year retirement period.
Overall, you can expect up to 10 percent interest on the investment in your 401k, which over a life time of compound interest averaging 5 percent could leave you with a retirement fund of $1,020,280.
This translates to an approximate yearly income of $56,680, post tax.
Missing one year of payments won’t stop you being able to retire, but it could make it that much harder to retire when you planned.
If you earn $50,000 and save for your retirement over 39 years, you could see your overall pension pot reduced by $57,310 to $962,970, or an annual $53,500 income.
Used this tool to calculate compound interest.
Nilay Gandhi, a Senior Wealth Advisor at Vanguard told Newsweek that it was essential that savers keep a cool head and continue investing in their pensions to help them through their later years.
He said : “Despite recent market volatility, it’s important for investors to maintain a long-term perspective grounded in a low cost and diversified investment approach.
“Retirement savers who remain invested can benefit from compounding interest and continued employer matches – advantages that otherwise wouldn’t be realized if contributions are halted.
“When possible, pay yourself first, even if it’s just enough to meet an employer match, as the money you save now can have a sizable impact on your financial situation later in life.”
In short, you are never too young to save towards your retirement, but if you start saving at 30, Fidelity recommends saving 18 percent annually or 23 percent if you start saving at 35 to be able retire with the same sizable pension pot.
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