And are you one of the people that refuse to take it?
Most people get excited about a 7 or 8% rate of return on their investments. But millions of Americans are actually giving up an astounding 100% immediate rate of return that’s right in front of them.
That’s right. A 100% return on their money, and they’re not taking it. I’m talking, of course, about the match that many company 401(k) and 403(b) plans offer.
If you have a 100% company match on a portion of your salary and you save $50, you immediately get another $50. That’s a 100% rate of return!!! But we don’t all take advantage of this free money. Why?
According to a 2015 study by Financial Engines, about 1 out of every 4 employees do not take advantage of this gift by not participating in their retirement plan; they were collectively missing out on 24 billion dollars of free money in that year alone.
Luckily, about two thirds of plans now auto enroll employees into their retirement plan. However, this can still come up short as most plans generally auto enroll only between 1 and 3% of salary, while many company matches go up to 6%, leaving a lot of free return on the table.
Then there are still those without this auto enroll feature who don’t enroll at all, even with a lot of encouragement to do so. So why not, when we constantly hear that there is a need for Americans to save?
It could be tight budgets or low priorities. It is no secret that people in their 20’s aren’t usually thinking about saving for retirement. The urge to spend extra money on fun stuff is usually a priority when you are young, as retirement may seem like it’s centuries away. But as anyone over 40 knows, time moves fast, and the people who get an early start on retirement savings can come out way ahead!
Here is one thing to keep in mind about putting money away. Since a traditional 401(k) (non Roth) is taken from pre tax dollars, the $60 you save may cost you only $48. That’s right; Let’s do the math…
Let’s say you earn a $1000 paycheck and 20% is taken for income taxes ( leaving aside other taxes such as for Medicare and social security), your take home pay is $800.
Now in that same scenario, if you were to contribute 6% to your retirement plan, that pretax savings doesn’t get taxed. Your $1000 paycheck only has $940 taxed. After 20% taxes of $188 you get $752 take home pay.
You see it doesn’t reduce your pay by $60, only $48 ($800 versus $752). Plus your company match gives you an extra $60. So you come out ahead!!
If your company offers a match, take advantage of it! Otherwise your giving up a 100% return.
