Make Money With A Match
Posted on July 2, 2015 by bob in MoneyWise
A recent story by Reuters columnist Liz Weston cited some revealing statistics:
— Just over 40% of Americans participate in a retirement plan. (That means 60% do not!)
— A quarter of retirement plan participants miss out on some or all of their available match.
— The aggregate value of the lost employer-matching contributions is $24 billion/year.
— The average cost per participant of the lost match is $1,336/year.
If you are working and have access to a 401(k) or similar retirement plan, you need to find out how your employer contributes to the plan on your behalf. Some plan sponsors (employers) simply contribute a set percentage of pay for the employees who choose to participate. If so, you need to be a plan participant to get a share of the employer contribution.
Most employers, however, structure the majority or even all of their plan contribution in the form of a matching amount. For instance, they might contribute 50% of the first 6% of pay that each plan participant contributes via pre-tax salary reduction. For an employee earning $50,000, 6% of pay amounts to $3,000. If the employee puts that much into the plan each year, the matching formula means that the employer will add $1,500 to the employees account (50% x $3,000). This means that the employee gets an immediate 50% return on their own contribution in the year that they put the money into the plan. (Matching formulas vary among employers. Some are more and others less generous than the one described above.)
When it comes to saving for retirement, maximizing the matching opportunity is the first step to take, prior to funding any other retirement savings option. If the employee above only contributed 3% of pay each year, they are leaving $750/year in employer-contributed money on the table. Over a period of just 15 years earning 6%, this lost money would have grown to a total of $17,457. That may not be enough to make you wealthy, but anyone who thinks it isn’t a worthwhile sum is welcome to send me a check for that amount.
It is a fact that relatively few American workers today are covered by an old-time employer-funded pension providing enough income to live comfortably in retirement. For the past 20-30 years the trend in retirement funding has been toward ever greater individual responsibility. The unfortunate fact is that many people have failed to save aggressively using the best available tools, which means they may face a prolonged period with limited resources.
The sooner one starts setting money aside for retirement, the longer tax-deferred compound interest can work in their favor. For those who failed to save much in their earlier years, loading the boat during their remaining working years still makes good sense. This may require cutting some expenses now, but the alternative is to cut much more later.
In any event, be sure to take full advantage of whatever matching formula is available in your retirement plan. And if you are married and your spouse has access to a match, make sure that he/she does the same.
Alan Wallace
Alan Wallace, CFA, ChFC, CLU, is a Senior Private Wealth Advisor for Ronald Blue & Co.’s Montgomery office, www.ronblue.com/location-al. He can be reached at 334-270-5960, or by e-mail at alan.wallace@ronblue.com.
