Retirement plan decisions made easy
Drill Down: Contributions When Your Employer Offers a Match
When your employer offers to match your contributions, then the question of how much to contribute is pretty simple: contribute at least as much as your employer will match. If your employer will match 50 cents on the dollar for your contributions up to six percent of your pay, then contribute at least six percent. If your employer will match your contribution dollar for dollar, up to three percent of your pay, contribute at least three percent.
There are often good reasons to contribute even more, but if your employer does not offer a match, make your decision the same way you would if there were no match at all. I’ll discuss the issues involved later.
Bill Says: If your employer will give you more money, take it. Whenever you can get a match, contribute at least the maximum amount that will be matched.
People worried about investment returns can sleep easy. If your employer is matching 25 cents on the dollars that you contribute, that’s a 25 percent return with no risk. Not even Warren Buffett would think he could do better than that.
If you are worried about your other priorities, like debt reduction, college savings, etc., I’ll address those issues soon. But if you simply think that money is too tight, then the solution is—more money.
OK, I understand that saving more money out of your paycheck doesn’t sound like the answer to money being tight in your family. Let’s address that concern. If money is tight, and you are not saving anything for your retirement, what do you figure the solution is? In the long run, you need to save for retirement. Putting off the time that you begin saving will merely increase the amount that you have to save later.
What has to change so that you will be able to save money for your retirement? Write down a list of areas that need adjustment. In many cases, it is behavioral changes that are needed: eating at home more often, less impulse buying, cheaper vacations, etc.
There is more justification for not contributing to a 401k if you have temporary needs that you are certain you will meet within the next few months. In that case, you need strong discipline to meet those other needs as soon as possible, so that you can get started contributing to your 401k as soon as possible. The benefit of having your money matched by your employer is so great that you don’t want to miss a single dollar of that contribution.
One cautionary note should be considered. Many employers have a vesting schedule for the employer match. For example, you may have to remain at the company for three years before you have earned the full match. The match money is going into your account, but you don’t really own it until you’ve completed the vesting period. After the vesting period, the match money is all yours. If, however, you leave your company before the vesting period is over, your 401k will have to surrender a portion of the match. Usually the vesting is gradual, such as: one fourth of the match is yours immediately, another fourth becomes yours after one year, yet another fourth after two years on the job, and the final fourth after three years.
If you think you might leave or be laid off before the vesting period, consider making a contribution amount that would be midway between what you would have contributed without a match and what you would have contributed with a match.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
» Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
Lesson 9: Your 401k, Your Other Assets, and Your Life
The 401k ebook is available in text, audio, and video formats. The current selected format is video. You may also switch to the audio or text formats by clicking on the icons at the top of the main lesson page.