Have you ever walked past a $5 bill on the ground without picking it up? If you aren’t contributing enough to your 401(k) to take full advantage of your company match, that is essentially what you are doing.
Employer matching of your 401(k) contributions means that your employer contributes a certain amount to your retirement savings plan based on the amount of your annual contribution.1 If your employer offers a matching contribution, try to commit at least the minimum amount needed to get the full benefit.
If you aren’t currently taking full advantage of your 401(k), you should because you are missing out on a key job benefit that can significantly boost your retirement savings over the long run. If you are contributing but have not yet maxed out, consider increasing your retirement plan input if you are able, especially if you recently got a raise or bonus!
Take The 1% Challenge
Often, it’s the little things in life that can make the biggest difference. That’s true when it comes to saving for retirement. Increasing your savings by just 1% now could mean a lot in retirement. A 1% increase may not seem like much, and that’s precisely the point. While you won’t feel a major sting when you get your next paycheck, your investments will benefit over the long run. Those small jumps by just 1% or 2% over a 20-year or 30-year career can really make a big difference in the end.
While 1% is a small portion of your annual earnings today, thanks to compound interest (see below), after 20 or 30 years your small contribution can make a big difference in your account balance when you retire. Think of a snowball rolling down a mountain. The longer that ball rolls, the bigger it gets and the faster the rate of growth gets. And this approach works no matter how old you are—or how far off retirement is.
Three Advantages of Contributing Regularly to Your Plan
CONVENIENCE
Once you have determined how much of your pay you want to contribute toward retirement, those contributions are automatically deducted from your paycheck. Super easy!
COMPOUNDING
Compound interest is what happens when the interest you earn on savings begins to earn interest on itself. As interest grows, it begins accumulating more rapidly and builds at an exponential pace.1
Compounding can turn a small investment into a large sum, but time is of the essence. The earlier you start saving, the more compounding can work its magic.
TAX BENEFITS
When you utilize your employer’s retirement plan, you can reduce your federal income taxes. If you make contributions on a pretax basis, you won’t need to pay current income taxes on the money that goes into your account. It will grow and compound without taxes until you withdraw them at retirement.
1 https://www.personalcapital.com/blog/retirement-planning/how-does-401k-matching-work/
If you are maximizing your company match, great! Keep going. However, if you have been holding off for any reason, we need to talk. We can show you how contributing an additional 1% to your 401(k) will impact your take-home pay and the potential positive impact you can have on your retirement. Fill out our contact form today to chat with an advisor.
