Why Your 401(k) Probably Isn't Enough for Retirement

You have a 401(k) through your employer and you dutifully contribute a percentage of each paycheck to it, confident that you're ahead of the game. After all, many people don't have a retirement account at all. While this is true, if you crunch the numbers, you may be surprised to find that you're not as far ahead as you thought.

A 401(k) can be a great way to save for the future, especially if your employer matches your contributions. But they do have their limitations. Here are a few things you need to know about using your 401(k) to save for retirement, along with some advice on how to boost your retirement savings even further.

Not all of the money in your 401(k) is yours

Traditional 401(k)s are tax-deferred, which means that you don't pay any taxes on the money until you withdraw it from the account. The tax brackets change slightly every year, but most people can probably expect to give away at least 10% to 25% of that money to Uncle Sam.

You also need to keep in mind that inflation will likely erode the value of the dollar even further over the next few decades, so you probably won't be able to live as comfortably on $40,000 in 30 years as you do today. While it's impossible to predict the exact rate of inflation, many experts recommend assuming a 3% annual inflation rate when calculating how much you need to save for retirement. So for example, if your living expenses amount to $40,000 this year, they may be $41,200 next year and $42,400 the year after that.

Your 401(k) also has a number of administrative fees that can eat into your profits. If you like the portfolio that you have and you're earning a good return, these fees may not affect you significantly. But if you haven't profited that much from your current 401(k), paying these extra fees may not be worth it. You can learn more about what fees you're paying by checking out your 401(k)'s prospectus or talking to your employer about the plan.

You probably aren't contributing enough

About one-third of Americans with a 401(k) are contributing 4% or less of their paychecks each month, according to a Vanguard survey. While it's true that compound interest is on your side, especially if you start investing early, this may not be enough for you to live on in retirement.

The median salary for workers in the U.S. is $44,564 per year, according to the Bureau of Labor Statistics. Let's assume you contribute 4% of that to your 401(k) every pay period for 30 years. Assuming your salary keeps pace with our 3% inflation estimate, your 401(k) will be worth just $299,140 by the time you're ready to retire. When you add in taxes and inflation, this amount probably won't even last you a decade.

Unfortunately, there is no magic number as to how much you should be contributing to your 401(k) each month. If you want to live comfortably in retirement, the first step is to calculate your approximate monthly expenses in retirement (remembering inflation and taxes) and your approximate life expectancy. The average life expectancy in the U.S. is 79 years, but you may live longer or shorter than this, depending on how healthy you are.

Then, subtract any money you'll have coming in from Social Security, annuities or a pension and figure out the difference. Then, use a compound interest calculator to determine how much your 401(k) will be worth when you retire, assuming you keep your contributions the same. From there, you can play around with it to see how much upping your contribution would net you.

How to boost your retirement savings

As a general rule, you should contribute as much to your retirement savings as you possibly can. If your employer offers a 401(k) match up to a certain percentage, you should aim to contribute at least that much so you can take advantage of the free money. But if you have extra cash, don't stop there. You're allowed to contribute up to $18,500 to your 401(k) in 2018 and up to $24,500 if you're 50 or older.

Another alternative is to open up an IRA and begin contributing some money to this as well. IRA contribution limits are lower -- just $5,500 in 2018 and $6,500 for those 50 and older. But on the plus side, there are fewer fees associated with IRAs and you have a lot more investment choices, so you may be able to grow your money more quickly than you could in a 401(k). Plus, if you open a Roth IRA, that money is taxed when you earn it, so when you take it out, you don't have to pay any taxes on it.

If you've contributed all that you can to your retirement accounts or if you don't want all of your money locked up where you can't spend it, you can choose to invest in a non-retirement investment account. You'll be taxed on the money you put in and on any money you earn by investing, but you'll have complete freedom to use it when and how you choose.

Contributing regularly to your 401(k) can help you build up a secure nest egg for the future, but it's important to make sure that you're investing your money intelligently and that you're realistic about how much you're going to need to live on. By bumping up your 401(k) contribution and possibly opening an IRA, you can give yourself a much better chance at a comfortable retirement.

The $16,728 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.