One of the easiest rules to follow when it comes to saving
for retirement is to not leave free money on the table. Yet that's exactly what
too many workers are doing by either investing too little in their company
401(k)s to receive the full company matching contribution or by not
participating in the 401(k) at all.
For someone in their early 20s who's just out of college and
earning a real paycheck for the first time, the idea of locking up your money
in a savings account that shouldn't be touched for another four or five decades
may not sound too appealing. In the early years at a fresh college grad's
starting salary, a company 401(k) matching contribution might not amount to
more than $50-$100 per month. That may not sound like much on the surface but
over time those small contributions add up to tens of thousands of dollars or
more. Given that most Americans are woefully unprepared for retirement from a
financial perspective and just not good savers in general, that free company
match is perhaps the easiest way to build up retirement account balances
without any additional work.
So let's put some actual numbers on the potential
surrounding the 401(k) matching contribution. The assumptions I'm going to use
can obviously vary based on specific circumstances but this should represent a
reasonable, relatively middle of the road scenario.
- Starting salary of $35,000 out of college.
- 45-year timeframe (using age 22 as the starting
point and continuing until the Social Security full retirement benefit age of
- 3% total company matching contribution.
- 7% annual rate of return.
- 3% annual salary increases.
Again, while individual circumstances may result in
different inputs, there's nothing in these assumptions that feels unreasonable.
The S&P 500 has historically earned more than 7% per year but using a more
conservative assumption is usually wiser. If you take the numbers above and
plug them into a financial calculator, you get a result of a little over
$311,000 in a tax deferred account. Almost a third of a million dollars in
essentially free money just for saving in a company 401(k).
If you take that $311,000 figure and use the old 4%
withdrawal rule, you can withdraw around $12,000 in the first year. Now, also
consider the example of someone working at a company that matches $0.50 for
every dollar up to 6% to receive the full company match. Combine employee
contributions (6%) along with company matching contributions (3%) and you have
a total portfolio that's nearing a value of $1 million by age 67. Using the 4%
rule again, you're now looking at an annual income of $36,000 from one's
retirement savings. Add in an income from Social Security on top of that and
you have the foundation of a secure, if not lavish, retirement.
As pretty much anyone will tell you, there's no reason why
workers shouldn't invest at least enough in their 401(k)s to earn the full
company matching contribution. While young workers may not like the idea of
saving their money instead of spending it, it's becoming increasingly essential
to take advantage of every opportunity available to boost retirement savings.
Taking advantage of the full 401(k) matching contribution
and combining it with the benefit of time and the power of compounding may be
the easiest and simplest way to achieve that.
here to access the full article on Seeking Alpha.