Check out these four tricks used to get you to spend more (without you knowing it).
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You’ve probably heard plenty about the common mistakes people make with their workplace retirement plans like cashing out their 401(k)s when they leave a job or taking out a 401(k) loan in a financial emergency.
But there’s one other mistake that will leave any dedicated retirement saver scratching their head. A recent study of 401(k) participants reveals that as many as one in four of us miss out on at least part of our employer match in our 401(k)s because we aren’t contributing enough to receive the entire match. The study estimates those workers are leaving an estimated $24 billion—that’s billion with a B—in retirement savings on the table! That breaks down to $1,336 per worker, equal to 2.4% of their annual income.
With that kind of money on the line, you and your investing professional should run the numbers on your 401(k) contribution amount to make sure you’re on track.
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It’s not too late to course correct if you find out you’re off by a percent or two. Knowing is half the battle. That estimated $24 billion could go a long way to bridging the nationwide retirement savings gap, not to mention your own personal savings shortfall. The study projected the impact of that missing $1,336 employer contribution based on a super-conservative rate of return. Over 20 years, they estimated that annual loss would grow to nearly $43,000.
That might not be enough to get your blood boiling, but we did our own estimates based on the long-term growth history of the stock market, and the loss could actually be almost twice as much—$84,000!
For younger workers, the loss is even greater. With 10 more years of compounding interest, that $1,336 per year could grow to more than $240,000!
The $20 Per Weekly Paycheck Difference
So why aren’t workers taking full advantage of their employer match? After all, it’s an instant and guaranteed 100% return on your retirement investment money, and that’s a deal you won’t find anywhere else.
The most likely reason is that it isn’t truly free money. You have to put your money in first to get the employer match. But increasing your 401(k) contribution is probably more affordable than you think.
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For example, a worker making $45,000 who files his income taxes as single with no dependents could increase his 401(k) contribution from 3% to 6% for only $19 per weekly paycheck! Because 401(k) contributions are made pretax, bumping up his contribution reduces his taxable income. So even though he’s putting in $1,350 more to his 401(k) each year, it’s only costing him $988.
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Not only that, his employer is kicking in more for his retirement too. The most common employer match is dollar for dollar up to 6% of the employee’s salary. Now that our example employee is maxing out that match, his employer is also contributing $1,350 more to his retirement.
What does that do to his retirement savings projections? That’s the most exciting part! After 30 years, that $19 per week means our sample worker, making an average income (that never changes, by the way) will have a retirement nest egg of $994,000. That's $488,000 more than he would have if he’d kept saving at a 3% rate!
If this guy can save nearly $1 million by contributing less than $40 total of his weekly paycheck, just think what he could do by investing a full 15% of his income for retirement!
Find an Investing Professional
If you’re going to make the sacrifice and reduce your take-home pay by any amount, you want to make sure you’re getting your money’s worth, right? Most 401(k) investors don’t realize you can consult your own investing professional about your 401(k) investments. Find an investing pro today!