Does your company or organization offer a retirement savings match? Do you opt in for the match if they do?
According to recent studies, the answer for many is “no.” Where a match is offered, 1 in 5 employees choose not to take full advantage of it.
How do these matches work?
Some organizations offer their employees additional retirement contributions based on the amount the employer contributes into the plan.
For example, some employers will match dollar for dollar up to 2.5% of the employee’s salary. So if the employee has a $50,000 salary, and they contribute 2.5% of their salary ($1,250), the employer will also contribute $1,250 to their retirement.
But here’s the deal—if the employee does not contribute to their retirement plan, the employer will not contribute any either. If the employee only contributes 1% of their salary ($500), the employer will only contribute $500.
Here is my hope—that you be the one who chooses to take the match. This is why:
1. Compounding. To some, a match may seem like an insignificant amount of money. What impact can 2% or 3% of your paycheck actually have on your retirement? A big one.
Compounding occurs when the percentage you earn each year is placed on your principal (the amount you contributed). So the next year, your gain is not just based on the principal, but the total amount of principal and whatever gains you had. For example, if you invested $10 and earned 10% over a year, you would earn $1 ($10 x 10%). Now you have $11. But if you earned another 10% the next year, you would not earn $1 but instead $1.10 ($11 x 10%). So after two years you have $12.10.
When you are investing 2% or 3% extra each year for retirement, the difference can be significant because of compounding. Here is a simple formula to remember:
A little bit of money + A lot of time = A lot of money
Take advantage of compounding.
2. You need more for retirement than you think. Many underestimate the money they need for retirement. Consider this—if you want your retirement savings to generate $40,000 of income per year without depleting your savings, you probably need about $1,000,000 (assuming at least a 4% annual gain). If you want more than $40,000 per year, more savings is needed. Often, the assumption about the amount required for retirement significantly falls short.
3. You won’t miss it. The amounts you contribute to a 401(k) or 403(b) are pre-tax dollars. The money that hits your bank account are after-tax dollars. Often, employees that take advantage of the match barely miss the after-tax amount, especially when they see the impact of their retirement savings.
4. It is your money. A match is a benefit you receive for working at that particular organization. If you do not take the match, you are refusing a benefit that you receive for your work. You are leaving money on the table.
How important is it to take advantage of a match? It’s Milestone 3 in The Money Challenge.
Milestone 1: Start giving.
Milestone 2: Save aside $1,500 for a minor emergency.
Milestone 3: Max out your 401(k) or 403(b) match.
If your company or organization offers a match, take full advantage of it. Access to a match is an opportunity you don’t need to let pass you by.