Retirement: Maxing out your company match for 401K contributions

Do you max out your 401k? 

You have potentially been making a HUGE mistake!

Mistake?  Missing out on free money. 

Please Note: I am not talking about why you should shoot for maxing your 401k in this article.  That is a different article at a different time.  <holding link for later>  I will say a lot of people are trying to catch up.

1 in 3 Americans has $ZERO saved for retirement

1 in 4 of people over 55 have no retirement savings
1 in 2 Gen X have less than $10k saved for retirement
3 in 4 of Millennials have less than $10k saved for retirement

 Source: http://time.com/money/4258451/retirement-savings-survey/

Is this a click bait article?

Actually, no.  Unlike most clickbait articles; I will have practical useful advice for free without a paywall.

Background

Does the following sound familiar?

You should contribute enough to your retirement fund to get your employer / company match.  

What is Company Match?

The company match is agreed upon (whole number) percentage of your salary per PAY PERIOD.   Let me say this again they match your percentage per paycheck.

Period # Per Year
Monthly 12
Bimonthly 24
Biweekly 26

Your company match does NOT count against your contribution limits

Example

  1. Your company matches 5% of your salary. This means if you contribute 5% of your pretax dollars they give you additional 5% of your PAYCHECK! 
    1. BOGO saved retirement
    2. Cool, 10% contributed
  2. Your company matches 50% of each dollar up to 6% of your salary.
    1. BOGOHO saved for retirement.
    2. Less cool, if you contribute 6% of your salary a company can give you 3% for a total of 9%.

What is a good 401k match: https://www.investopedia.com/articles/personal-finance/120315/what-good-401k-match.asp

So what is the issue?

Maths!  A couple of pitfalls (don’t do these)

  1. Some retirement plans allow you to max out contributions early in the year
    1. You will lose out on company match per Pay Period
      1. Lose out on free money.
    2. You lose out on Dollar Cost Averaging – https://www.investopedia.com/terms/d/dollarcostaveraging.aspd
    3. Everyone has their own financial situation.  I’m just saying doing this will NOT company match.
  2. If you max out your 401k before your last pay period you miss out on company match
    1. Do some simple math to contribute the same amount per pay period (at or above your Company Match)
    2. Dollar cost averaging – https://www.investopedia.com/terms/d/dollarcostaveraging.asp
    3. 2019 401K contribution limit is $19,000 for those below 50 years old.
      1. Calculator: https://www.calcxml.com/do/qua09

Summary

Retirement 401k Company Match is per pay period.  Ensure that you have a contribution rate at or above your company match for every pay period.  If you are maxing out your 401k don’t do it early.  Be consistent for the long term.

Random 401k Thoughts

  • Over 55 million Americans have a 401k – https://www.ici.org/policy/retirement/plan/401k/faqs_401k
  • A 401K is an IRS tax code that allows you to save tax free money for retirement.  A lot of employers provide 401k’s or some other variation (403b and 457b for examples). 
  • When I first started working you had to opt into a 401k.  What a tragic mistake when it was originally designed.  Now most people have to opt out.  Why is this a good thing?  Well turns out saving early maxes a huge difference with compounding interest. 
  • 401k Contribution limits are usually whole percentage points
  • Young people can opt into yearly increase of saving to get to max out
  • Older people tend to crash budget and save once they get close to retirement.  Max out savings.
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