Saving for retirement is one of the most important financial steps you can take. But here is the truth: the biggest mistake most people make with their retirement contributions is not about how old they are or how much money they make. The real mistake is keeping contribution rates flat, year after year.
The good news is that this mistake is easy to correct. Both IRAs and 401(k) plans give you tools to boost contributions without putting a major strain on your paycheck.
What is the biggest mistake people make with retirement contributions
According to Lisa A. Cummings, Esq., an attorney and executive vice president at Cummings & Cummings Law, “The biggest retirement mistakes most workers make is keeping contribution rates flat year after year.”
She pointed to a 2024 Federal Reserve survey showing that nearly half of U.S. households have less than $65,000 saved for retirement. For someone earning $70,000 a year, staying at just a 3% employee contribution means saving only $2,100 annually. That amount will not come close to replacing income once retirement arrives.
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Why increasing contributions matters
If you are not steadily raising the amount you put into your retirement account, you are leaving a lot of future money on the table. Even small increases make a big difference because of the power of compounding.
Think of it this way:
- Adding just 1% more each year could mean thousands of extra dollars by the time you retire.
- If you earn $70,000 and increase contributions by 1%, that is only about $58 a month in the first year. By the fourth year, your annual contribution could grow to more than $7,000.
- Since contributions are pre-taxed in many plans, the actual impact on your take-home pay is smaller than you might expect.
How employer matching boosts your retirement savings
Employer matching is another reason to raise your contributions. Jared Hubbard, fintech product manager at Plynk, said, “As you put money aside, you can maximize your savings through retirement accounts such as IRAs and 401(k)s.”
If your employer matches part of your contributions, not taking full advantage is like turning down free money. For example, if the employer match is 50% on the first 6% of pay, failing to contribute that full 6% means you are giving up guaranteed money that could have been added to your retirement fund.
Cummings explained, “Once the employee passes the maximum employer match, even small increases in their contribution amount continues to compound powerfully.”
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How to fix flat contributions in your retirement plan
The solution is easier than most people think. Many 401(k) and 403(b) plans let you set up automatic contribution increases each year. This takes the effort out of remembering to raise your percentage. That means:
- You can schedule a 1% annual increase.
- On a $70,000 salary, that is only about $58 more per month in the first year.
- Over time, these small boosts add up to a large nest egg without feeling like a heavy hit to your paycheck.
IRAs also allow for flexibility in contributions, and if you are 50 or older, you are eligible for catch-up contributions. This means you can save extra beyond the normal annual limit to make up for lost time.
