Your Retirement Match Is Worth More Than You Think!

If you read my path to financial freedom carefully, you may remember one of the steps was to contribute to your retirement plan at work at least up to the employer match.

When an employer offers a retirement plan, they often incent you to participate by matching all or a portion of your contributions.  When I retired, my employer was matching one-quarter of my contributions of up to 6% of my salary.  So when I put 6% in, they put 1.5% in.  Many companies have a match far better than this one. But even with this match, over $36,000 of my 401k balance was from my final employer’s match when I retired.  Add in my other company matches and I’d expect the current value is over $100,000!

People often refer to the employer match as free money yet many employees leave a portion or all of this free money on the table.

If knowing that it is free money isn’t enough, this is the best free money you can get because it is tax deferred.

Normally, for every dollar you earn, your employer removes taxes–7.65% for FICA and Medicare and another 15% to almost 40% for federal taxes and about 5% for state taxes.

But guess what, when an employer matches your 401k contributions, no taxes are due!  You NEVER pay FICA and Medicare and you don’t pay any federal or state taxes until you withdraw the money.  This may be decades from now so this money gets to grow and grow without being taxed!

Ok, are you convinced 401k match is amazing but you just can’t find room in your budget to contribute to your employer’s maximum match?

It doesn’t cost as much as you think.  Because traditional 401k contributions come out before Federal and state taxes are calculated, your taxes will go down.  A contribution of $50 to your 401k should only reduce your net pay by about $40.

If you can’t do it now, could you commit to doing it when you receive your next raise or bonus?  Increase your 401k contribution by 1% each time you receive a raise.  You won’t even notice the missing money!  Commit right now – come on you know you can do it!

Need some inspiration?  Here’s my favorite chart but using a traditional retirement plan this time (here is the same chart with Roth plans).  When you can retire is just math, if you contribute 5% to your traditional retirement plan, you’ll need to WORK 61 years if social security provides 40% of your needs.  If you start at age 25, you can retire at 86:

Working Years Until Retirement
Traditional Retirement Contribution Without Social Security With Social Security Providing 40% of Needs
5% 71 61
10% 57 47
15% 48 39
20% 42 33
25% 37 28
30% 32 25

All calculations assume a 5% investment return after inflation, a 4% withdrawal rate in retirement with expenses in retirement equal to your after savings take home pay and a 25% tax rate.

What step can you take today to insure a reasonable retirement date?

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Author: Ms. Liz

A CPA, I retired at 51 and I am helping people create their fantastic futures!

4 thoughts on “Your Retirement Match Is Worth More Than You Think!”

    1. I rolled my 401k balance over to an IRA with Vanguard. My main reason was to avoid the fees our 401k provider added on top of the mutual fund fees. I started by contacting Vanguard and opening accounts with them (one for my Roth and one for my regular 401k). They contacted my 401k provider and initiated the rollover process. I had a contact at Vanguard who worked with me through the entire process.

      I chose Vanguard because they are a mutual company–we investors own the company. They don’t have two masters to answer to–ownership and investors. Fidelity and Schwab are good too and have low costs but they have profit goals in addition to investor satisfaction goals.

      Even though my money was in Vanguard funds within the 401k, they still had to sell the shares and then purchase new shares once the transfer to Vanguard was complete. If the market had taken off during the week I was in transition, I would have been sad; if the market had tanked, you would have been invited to a party.

      Because my balance was high, I had to have a bank guarantee on my signature rather than just a notarized signature. This part was a bit of a hassle. I had to provide my most recent 401k statement, two forms of id, and the applications from Vanguard. They verified that names and account numbers matched on everything and guaranteed my signatures. Be sure to contact your bank in advance to make sure an authorized person will be available when you go in for this. At my bank, there was no charge which is strange because they do charge to notarize which is far less time consuming.

      You should be able to withdraw your current balance and continue to contribute since you are still employed but check with your employer to make sure this is true and it won’t affect your matching.

      Thanks for stopping by Phil and Happy Birthday! Email me at mslizmm@gmail.com if I can help further.

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