September 15, 2020
By Rahul Iyer
Do you contribute to your 401K? If not, you’re making a grave mistake, just like 25% of Americans.
I know it’s hard when you already cut it close. You barely scrape by, so how are you supposed to come up with the money for retirement money too? I’ll give you one big reason (although there are many) – employer contributions.
If you don’t at least contribute as much as your employer will contribute, you might as well open your window and throw money out of it. It’s equivalent!
Many employers match your contributions. Some match dollar-for-dollar and others match $0.50 for every dollar.
Even if it’s $1,000, that’s $1,000 you didn’t have for retirement before and you didn’t have to anything for it, well except work, but we all have to do that.
Know your employer’s benefits. If you ignored the notification to sign up for your 401K because you became eligible, go back and dig it out. What does your employer offer?
You’ll likely see it something like this.
Your employer will match dollar-for-dollar up to 4% of your income. That’s just an example – each employer has its own benefits, but you get the idea.
Here’s what it would look like.
John works for XYZ Company who offers a dollar-for-dollar match up to 5% of John’s salary. John earns $75,000 a year. This means XYZ Company will put up to $3,750 in John’s 401K if he does.
See the key phrase there – ‘if he does’? John must contribute first and then his employer will match it. That’s $7,500 in your 401K in the first year that you can contribute.
Those earnings add up through the years and there’s nothing better for retirement income than compounded earnings. Take advantage!
Once you know your employer offers matching contributions on your retirement money, look at their vesting schedule.
In other words, how long do you have to be at the company to be able to withdraw the funds? I don’t mean to withdraw and use them now, but how long before you can leave the company and take the employer's contributions with you?
Some companies fully vest your funds right away and others have longer vesting schedules – some as long as 5 years. It pays to stay if you have a vesting period because you can roll the funds over into your new company’s 401K if you leave.
Here’s the key – never give up retirement money. If there’s an employer match, take it. Cut corners where you need to so you can contribute at least the employer’s match. Ideally, you should contribute more and the IRS allows up to $19,500 in 2020, but if you skip out on what your employer will contribute, you’re throwing money out the window and no one likes that feeling!