Is 1% good for 401(k)? [2024]

A 401(k) plan is an employer-sponsored retirement savings account that allows employees to contribute a portion of their paycheck before taxes are taken out. The contributions and any investment earnings grow tax-deferred until money is withdrawn. Many employers also match a percentage of employee contributions, typically up to 3-6% of pay.

When deciding how much to contribute to a 401(k), one common guideline is to save at least 10-15% of your income for retirement including any employer match. But is contributing just 1% still worthwhile if you can’t afford to save more? Below we’ll analyze the pros and cons of contributing 1% to a 401(k) to help you decide.

The Pros of Contributing 1% to a 401(k)

It Takes Advantage of Tax-Deferred Growth

Contributing pre-tax income to a 401(k) means you don’t pay income tax on it today. Instead, the money grows tax-deferred over time, meaning you avoid paying taxes on any investment gains until you make withdrawals in retirement. This benefit applies even if you contribute just 1% of your pay.

Over 30+ years, that tax-deferred growth can add up. For example, if you earn $50,000 per year, contributing 1% ($500) annually and earning a 7% average annual return, you’d have over $48,000 after 30 years. Since none of that growth was taxed along the way, contributing 1% let you end up with more money than investing post-tax income.

It Qualifies You for an Employer Match

Many employers offer a 401(k) match to incentivize retirement contributions from employees. Typically employers match 50% or 100% of employee contributions up to 3-6% of pay.

So by contributing just 1%, you could be leaving matching funds on the table from your employer. This essentially gives you free money toward retirement. Even if your employer match is small, it’s still better than nothing.

It Establishes the Savings Habit

One challenge many people face is simply getting started saving consistently. Contributing even 1% to your 401(k) establishes the habit of automatic paycheck deductions going into retirement savings each pay period. This habit tends to stick over time and often leads savers to incrementally increase their rates later as pay rises or expenses change.

So while 1% may not seem like much, thinking of it as establishing lifelong savings discipline rather than achieving a savings goal can provide more motivation to start small if needed. Over a 30+ year career 1% can really add up.

The Cons of Contributing Just 1% to a 401(k)

It May Not Lead to Adequate Retirement Savings

While contributing 1% is certainly better than 0%, on its own it is unlikely to result in enough retirement savings for most people. One rule of thumb is you should save 10-15% percent of income for retirement including any employer contributions. At a minimum, savers should take advantage of full employer matches before contributing more to IRAs or other savings.

So while 1% is a start, to end up with sufficient retirement savings you will probably need to increase that over time to hit a 10%+ target rate. Contributing only 1% for many years can leave savers playing catch up late in their careers to retirement goals.

You Could Miss Out on Full Employer Matching

As mentioned above, many employers provide a 401(k) match to employees but this only applies up to a certain contribution percentage, commonly 3-6% of pay. If you only contribute 1%, you won’t maximize the “free money” from full employer matches.

For example if your employer matches 100% up to 3% of pay, contributing 1% means you are only getting a third of the matching funds you could get. Over decades of saving, that additional 2% match really adds up. Try to contribute at least enough to maximize employer matches before funding other accounts.

The Impact of Fees May Be Larger

401(k) plans charge investment and administrative fees on assets which can take away from your returns. While these fees have come down in recent years, they still average around 0.5 – 1% annually. The impact of these fees is much greater if you have less money saved overall.

For example if you have $100,000 saved, a 1% annual fee is $1,000. But if you only have $1,000 saved because you were contributing 1% annually, a 1% annual fee is $10 which makes a 10% impact. Having more assets saved helps minimize the impact small fees can have over decades.

Low Contributions May Not Impact Behavior

Some research has found that very small financial commitments don’t necessarily motivate bigger behavioral changes the same way larger amounts do. For example, contributing 1% of income to retirement savings may not lead savers to make budget adjustments to free up more savings.

However, once contributions become more noticeable percentages wise (5%+) this does spark more engagement from savers to evaluate expenses and shift budgets for additional savings. While 1% is better than nothing, it may not be enough to impact behaviors to enable higher savings rates.

Should You Bother Contributing 1%?

Based on the pros and cons outlined above, here are some situations where contributing 1% to a 401(k) still makes sense:

• If 1% allows you to qualify for an employer 401(k) match program (free money)
• As a strategy to start establishing lifelong retirement savings habits
• If 1% is honestly all you can afford right now but you plan to increase later

And some reasons why contributing only 1% may not be the best strategy:

• If you already have significant retirement savings overall
• If you could afford to contribute 3-6% to maximize employer matches
• If 1% contributions won’t actually motivate you to evaluate expenses and shift budgets to increase saving more substantially over time

The Takeaway

Contributing 1% to a 401(k) plan is certainly better than contributing 0%. It takes advantage of tax-deferred investment growth and may allow savers to collect some level of employer matching funds. For some as a way to establish lifetime savings habits it can be a reasonable start.

However, for most savers 1% is likely inadequate on its own to reach sufficient retirement savings levels over their careers. View 1% more as a gateway to start saving that leads over time to higher 10-15%+ savings rates, rather than as the ultimate goal itself.

One percent brings attention, but ten percent brings commitment. Focus less on any particular percentage as a goal, and more on constant evaluation and improvement of your saving rate regardless of career stage. Saving isn’t always easy but it is always beneficial.

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