Automatic Investing: How It Helps Build Your Retirement

Why Automatic Investing is a Good Idea for Your Retirement Plan

When it comes to saving for retirement, not all Americans prioritize doing so. In fact, 57% of Americans felt that they were behind on their retirement savings,¹ and a recent survey in 2024 showed that 16% of workers were contributing less than the year prior, and 21% contributed nothing at all in 2023¹.

Whether you find yourself in a similar situation or not, ensuring you are set up with automatic investing in your retirement plan is an essential building block of having a meaningful nest egg when you reach retirement.

What is Automatic Investing?

As the name suggests, automatic investing means that a set amount of money is being transferred from your account into your retirement account on a regular basis. Typically, when you enroll in your company’s 401(k) plan, you set up a percentage of your salary to be pulled each paycheck and contributed to your 401(k) account. This is automatic investing! However, if you don’t have access to company retirement plan benefits or have a Solo 401(k) plan, you will need to establish an auto-ACH with your bank account to make your contributions automatic. This is typically set up for once a month, bi-weekly or even weekly contributions depending on your preference and you can always adjust the percentage or amount you are contributing. Make sure to keep track of the contribution limits each year so you don’t exceed them. Many 401(k) plans have guardrails that help you manage this.

Why It’s Worth Enabling Automatic Investing

If you want to ensure that you are building for your future self, automatic investing is likely the easiest and potentially most powerful way possible to build wealth. It doesn’t require you to remember to invest each month or be tempted to spend the money you’d planned to put away on something else. It makes budgeting for retirement one of the simplest things you can do. Thanks to the power of compounding, steady contributions can add up significantly and you’ll end up with a sizable amount saved for retirement.

Not only can you make your retirement contributions a habit, but automatic contributions allow you to stay on top of contribution deadlines. For 401(k)s and IRAs, there are deadlines at the end of the year and during tax season that may restrict the amount you can contribute to your plan as an employer (if you sponsor a retirement plan) and as an employee. If you haven’t been regularly contributing to your plan throughout the year, these deadlines may sneak up on you, and you may miss out on the chance to maximize your contribution and potentially save on taxes for that year.

Dollar Cost Averaging vs Lump Sum Investing

If you are automatically contributing a portion of your income to your retirement plan every month, you're inherently practicing dollar cost averaging, which is the act of investing smaller amounts over time rather than making a single large investment, known as lump sum investing.

By investing smaller amounts periodically over time, you are minimizing the risk you may take on by investing a large sum of money all at once. For long-term investors, dollar cost averaging smooths the ups and downs of a volatile economy. When markets drop, your money will buy more shares, and when markets rise, you are buying fewer shares. If the market starts to underperform, it is not as much of a shock to see your accumulated investment decline by 10 percent than it would be to see a large sum of money decline in a short period of time. This example shows how it can work:

Lump sum investing, on the other hand, allows you to take advantage of time in the market but contributing a larger amount all at once. Instead of your contributions being spaced out over a period of time, the lump sum investment puts your money to work immediately, so it is in the market longer than funds allocated to dollar-cost averaging.

There are some issues to point out when it comes to lump sum investing, however. First, most people don’t have the annual amount they would put into their retirement account readily available to invest all at once. Contributing a portion out of each paycheck is much easier. Second, lump sum investing puts you at more risk of timing the market issues and no one is good at this (requires luck). If you buy when markets are high, it could take a long time to get a good return. If you buy at a low, congratulations, you are ahead of the game. Just know that it’s a much riskier approach to do infrequent lump sum investments when building for retirement.

If you are in the situation to do some lump sum investing, it can be a smart strategy to automatically invest in your 401(k) or IRA, and make a lump sum contribution once or twice a year in a retail account to top off your retirement funds and help maximize your savings within your budget.

Pay Yourself First

At the end of the day, your retirement plan is one of the most important assets to invest in. Once you hit your retirement age, a well-funded nest egg will provide financial security and likely some peace of mind. This is why we advocate for “paying yourself first” or prioritizing saving over any other financial goals or needs. Automatic investing can help do just that. Experts recommend contributing 10-15% of your income to your retirement plan. If that’s not feasible right away, you can start smaller and incrementally increase your contributions by 1% each year.

Not only will your assets grow over time, but you can opt to have your contributions made tax-deferred, so your taxes are lowered now, and the money isn’t taxed until it is withdrawn in retirement. You could also contribute some or all to a Roth 401(k) or Roth IRA and pay the taxes now, so you don’t have to worry about them when you reach retirement age. Depending on how your 401(k) is set up, you have the flexibility to do either or both, so allocate your 401(k) contributions depending on your needs.*

So, consider setting up automatic contributions for your 401(k) or IRA accounts. Before you know it, you’ll have amassed a nice nest egg for retirement without even thinking about the account withdrawals. And better yet, your future self will thank you.

Key Takeaways

1. Automatic investing allows you to automatically contribute a portion of your income to a retirement plan on a regular basis.
2. Most company 401(k) plans enable you to make automatic contributions with each payroll to your account. If you set up an IRA or Solo 401(k), you will need to set up an auto-ACH on the frequency you choose.
3. Dollar cost averaging is the act of investing regular amounts over time. By contributing to your retirement plan on an automatic basis, you are taking advantage of dollar cost averaging. When markets drop, your money will buy more shares, and when markets rise, you are buying fewer shares. Markets do not need to fully recover for you to achieve positive returns.
4. Lump sum contributions are one time or infrequent investments. These can be inherently riskier as more is left to market timing which often requires luck to get better than average returns. Performing both lump sum investing and dollar cost averaging can potentially be a good strategy to help you maximize your savings within your budget.
5. Experts recommend contributing 10-15% of your income to your retirement plan, but you can start smaller and increase your annual contribution by 1% each year. If you are enrolled in your company 401(k), see what your current salary deferral level is and adjust as you are able to stay on track.
6. Your automatic contributions can be made tax-deferred, so you can potentially lower your taxable income in the current tax year and then manage taxes later when you withdraw your funds in retirement. You can also make Roth contributions and pay taxes now so you can withdraw them tax-free. Many 401(k) plans enable you to contribute some tax-deferred and some Roth (or after tax) if you choose.

_{¹Source: Bankrate Retirement Savings Survey, August 19-21, 2024
*Assets withdrawn before age 59½ may incur a 10% tax penalty.}