Not too long ago, I was trying to demonstrate how NOT taking full advantage of your 401k matching contributions offered by your employer was causing you to lose out on more money over the course of your career than you probably thought!
While it’s never too late to get your personal finances in order, one simple mistake I see people making all the time that kills me is when they wait as late as 5 to 10 years before they finally get with the program and start contributing enough to their retirement plan to get the full 401k matching from their employer. I beg you – Please don’t waste another year! Remember time is one of your greatest assets as an investor, so don’t squander it!
In this post, I’ll show you just how powerful taking advantage of your full 401k matching from your employer as early as possible can be for you.
Two Employees – Two Possible 401k Outcomes:
Let’s pretend two employees work for Company X and they both make $60,000 per year gross. Company X has a generous 401k matching plan where they will match a quarter of a percent for every 1 percent of your salary that you contribute to your 401k, up to 8%. So for example: If you contribute the full 8%, they contribute 2%. Therefore, the maximum match would be:
$60,000 (your salary) x 8% (your contribution) x 0.25 (401k matching) = $1,200
Now in this example, let’s say that both employees working for Company X at age 25.
Employer 1 starts off aggressive! He invests in his 401k plan to get the full match of $1,200, and he does this for the next 10 years. Then for whatever reason (new job, other investment opportunities, etc), he stops! He never invests in that retirement plan again and never receives another dime from his 401k matching either.
Employer 2 starts off lofty. He doesn’t invest in his 401k for every excuse you can imagine, and he passes up the free money 401k matching for the next 10 years. Then at age 35 after he reads his favorite blog, My Money Design, he realizes his mistake and takes full advantage of his 401k to get that $1,200 employer matching.
My question – By age 65, who has more money? The employee who saved early for only 10 years or the one that started late and saved for 30 years?
Starting Your 401k Matching As Early As Possible:
The answer: Employee Number 1 would have more money! $38,988 more!
Yes, if you assume an annualized average 8% return from investing those employer contributions in something like a stock market index fund, then Employee 1 will still have more money than Employee 2 even though Employee 1 hasn’t added to his investment plan in 30 years!
How is that possible? That’s just the power that compound interest has on investments and why time is such an important asset! The more money you can build up as early as possible, the greater potential it has for turning into a substantially sized fortune!
Can you imagine what the 401k matching contributions would look like if Employee 1 had continued to contribute to his employer plan throughout his whole career? There’s no need to guess – we can calculate the outcome ourselves:
Now Employee 1 has over $174,928 more than Employee 2. And all in just extra 401k matching contributions. Not a bad return for using a little bit of strategy!
Readers – Did you start getting your full 401k matching from your employer right away, or did you wait? If you waited, what was your reason? Will this example change your mind?