If someone were to say to you they’d match—dollar for dollar, no strings attached—every dollar you put into your savings account (effectively doubling your money for free), you’d jump at the chance, wouldn’t you?Yet nearly 40% of us aren’t using our employer 401(k) matching benefits. Let’s talk about that for a bit.
Making the most of your employer’s 401(k) match is one of the most important financial strategies you can make. If you think about it, there’s no other investment with a return this good, and guaranteed.
Your employer is basically giving you free money towards your retirement.
How Employer Matching Works
Not all companies offer 401(k) plans—some offer different types of retirement plans that also offer matching (I’m using 401(k) here as the example), some don’t offer any retirement plans at all. Either way, if your company offers a retirement plan with matching definitely look into it.
The program will differ depending on your company’s policy, but here are a couple of common policies:
A common matching scheme is a 50% match of your contribution up to 6% of your gross salary. So for every dollar you put in, the company will put in 50 cents. The max a company will put in for a person with a $50,000 salary, in this 6% cap scenario, per year, is $1,500.
Calcxml 401 match calculator can run those figures for you, including if your company offers a secondary matching schedule (e.g., after the first match, if your company offers a 50% match on the next 3% you contribute).
Another, even better example matching scheme is 100% match on contributions up to 5% of salary. So for every dollar, up to 5% of your salary, you’d get a matching dollar in your retirement fund. If you save $1000 yourself in your 401(k), for example, you’d see $2,000 at the end of the year (not including investment gains and losses) thanks to the employer match.
That’san extra $1,000 you would not otherwise see!
Update: As a few readers have pointed out, the Federal government employees match isn’t a straight 100% match on up to 5% of salary. The government contributes automatically 1% of your salary, whether you contribute to your retirement or not if you’re a government employee; then they match 100% of the next 3% of your salary you contribute; then they’ll match 50% for up to the next 2% of your salary you contribute.
Another Reason Not To Pass Up on The Match: It’s Like Taking a Voluntary Pay Cut
We talk about the employer match as being “free money,” but that might not actually be really so generous. A study by the Urban Institute recently pointed out that some employers actually lower their employees’ salaries by the amount of the potential 401(k) contribution. As Bargaineering summarizes:
if your employer said they’d match your contributions up to 3%, they were probably offering you a salary that was 3% lower than what they would be offering if there were no 401(k) available to you.
Passing up on your employer match is like taking a voluntary salary reduction, which no one really would do.
Often people don’t contribute to their retirement plan because of two reasons: They find it too confusing to get started investing or they have trouble making ends meet and don’t think they can afford to invest.
For the first case, you can invest in a target date fund or lifecycle fund, which is a mutual fund that automatically rebalances for you as you get closer to your target retirement date.
Once you get your feet wet, you can start learning retirement planning basics and using tools to plan your retirement.
For the later problem of not thinking you can afford to invest, try to find more room in your budget to at least make the match (or as most of it as possible). Time is your biggest asset when it comes to investing, so getting started as early as you can, even with a little, will pay off.
Since most retirement plans also take contributions from your paycheck before taxes are taken out, you’ll also be saving a lot more than you think!
Got any thoughts or tips on employer matching or retirement planning? Let’s talk in the comments.
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