Millions of employees have an employer who matches some, or all, 401(k) contributions. But too many Americans don’t take advantage of it.
While the majority of workers with 401(k) plans contribute enough to take full advantage of their employer’s matching program, about 20 percent of people choose not to. The Motley Fool explains why it’s so important:
Let’s say that you earn $100,000 per year and that your employer will match 50 percent of your contributions, up to five percent of your salary. So, you choose to contribute $5,000 into your 401(k) each year and your employer matches 50 percent of your contributions for a total of $7,500 flowing into your account annually. Over a 30-year period, your account could be expected to grow to approximately $708,000, assuming seven percent annualized investment returns.
On the other hand, let’s say that you choose to contribute just three percent of your salary, which is a common automatic contribution level set by many employers. Including the employer match, this means that just $4,500 will go into your account per year. Each year, you’re missing out on $1,000 in employer contributions that you could have received for contributing the five percent matching limit. What’s more, a move like this can really add up over time—assuming the same seven percent annualized returns, your account would only grow to about $425,000. That $283,000 difference could have a big impact on your financial security after retirement.
Not everyone is lucky enough to work somewhere with an employer matching program. Take advantage of it now! If you wouldn’t turn down a raise, then why would you turn down free retirement income?