If you’ve ever heard the phrase “don’t leave money on the table”, then you know that it’s a saying for walking away from a deal where you could made a whole lot more! While none of us ever wants to do this intentionally, our actions sometimes result in the contrary; especially when it comes to 401k matching from your employer!
If you have a 401k retirement plan (or any other employer sponsored retirement plan) where they have some type of “matching” system of putting money in your account for you, and yet you DON’T contribute as much as you need to get that full match, then you’re just leaving money on the table! Why are you passing up FREE money?
Don’t think it’s not that much money to care? That it’s not a big deal? That investing in your IRA vs 401k is the better bet? I always here these accuses from my fellow co-workers and it drives me crazy! Let’s run the numbers and find out just how much money you’re actually losing.
401k Matching Example – Only Half:
Let’s say you work for Company X and make $60,000 per year gross (before taxes). 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%. For example: If you contribute the full 8% of your salary, they contribute 2%.
Now for whatever reason, you stubbornly only contribute 4% to your 401k which results in a 1% match (half of the maximum of what your employer is offering).
$60,000 (your fake salary) x 4% (your contribution) x 0.25 (401k matching) = $600
You say “That’s only $600 per year; that’s no big deal! It’s only $18,000 by the time I retire in 30 years!” But I say it is a big deal …
Sure the straight-line calculation of $600 x 30 years = $18,000. But what about the future investment value of that money?
Over a 30 year time span, that $600 invested with an 8% annualized return (perhaps in a stock market index fund) is going to leverage the effects of compound interest to turn into a potential value of $67,970! That’s 3.8 times more than what you THOUGHT you were losing.
Over a 40 year time span, that $600 x 40 years = $24,000 is really a potential investment value of $155,434 in lost 401k matching money! That’s almost 6.5 times more money that you thought! Now does this qualify as a big deal??
401k Match Example – Nothing at All:
What if you were EXTRA stubborn and didn’t invest at all in your employer’s retirement plan to get that full 401k matching? What’s the maximum potential loss in free money from your employer (or gain if you take FULL advantage of it)?
Going back to our Company X example, their maximum 401k match is a quarter to a dollar up to 8% which equals:
$60,000 (your fake salary) x 8% (your contribution) x 0.25 (401k matching) = $1,200
Crunching the numbers, our graph looks like this:
You’d be missing out on the following:
• In 20 years, you’d have lost $24,000 in straight contributions or a potential investment value of $54,914!
• In 30 years, you’d have lost $36,000 in straight contributions or a potential investment value of $135,940!
• In 40 years, you’d have lost $48,000 in straight contributions or a potential investment value of $310,868!
The Bottom Line – Get Your Full 401k Employer Matching Contribution:
Don’t miss out. Make getting your full 401k matching part of your money design. Talk to whoever handles your 401k plans at work and find out what the rules are (each employer is just a little different). Find out how you can MAXIMIZE your 401k matching contributions from your employer and take advantage of their FREE money. Judging from the modest examples above, can you really afford not to?
Readers – Do you know what the rules are to get your full 401k matching from your employer (or similar retirement plan)? Are you already taking advantage of it? If no, why not?
2) Six Easy Steps to Figuring Out Your Retirement
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