One out of five Americans do not take advantage of a terrific benefit: employee sponsored retirement savings accounts that include an employer match of some or sometimes all of the employee’s contributions. Most workers do contribute more than enough to enjoy the benefits of their employer’s match, but what is going on with the 20% who don’t?
USA Today recently ran an article, “1 in 5 Americans are making a terrible 401(k) mistake” that says this may be one of the worst retirement mistakes you can make. While it may not look like a lot of money, ignoring this benefit now is not a wise choice. You’d be surprised at the difference it can make when you retire.
About three-quarters of companies offering 401(k) retirement plans have some type of matching program, usually based on an employee's contributions and capped at a percentage of their salary. For example, a 401(k)-matching policy may be "50% of employee contributions, up to 6% of total compensation."
Therefore, if you earn $50,000 a year and contribute $3,000 to your 401(k) or 6% of your salary, your employer will contribute an additional $1,500 into your account. This “free” $1,500 could help offset an unforeseen future cost. Think what contributing more could lead to.
Yet, there are 20% of the participants who don't contribute enough to take full advantage of their employer match. Apart from cashing out your 401(k) and spending the money, this may be the worst retirement savings mistake you can make.
Your employer match is vitally important. The maximum contribution level your employer is willing to match, should be the least you put into your 401(k). If you don’t do this, it’s like turning down free money.
This happens frequently with younger people just beginning their careers. They may feel that when starting their first job with an employer-sponsored retirement account, it is difficult to effectively reduce each paycheck by 5% or more to contribute to a retirement account due to other financial obligations staring them in the face.
Many employers' 401(k) plans now have automatic enrollment for new hires, usually with a low contribution rate such as 2% or 3%. The trouble is however, many people simply forget to make a change to up their contributions.
Think of these matching contributions are part of your salary package. If you aren’t contributing enough to qualify for the match, it’s as if your employer was offering you a raise and you said, “No thanks!”
Planning for retirement can either seem far off or feel daunting, but working with an experienced estate planning attorney can help ensure you achieve your future retirement goals. For more information on retirement planning and other estate topics, visit our website and schedule your consultation today to make sure you are maximizing your saving capabilities.
Reference: USA Today (February 12, 2018) “1 in 5 Americans are making a terrible 401(k) mistake”