401k Advice – Stop Passing Up Free Money!

by Khaleef Crumbley on October 29, 2010

in Personal Finance,Retirement

Money, 401k Employer Match

There are many things that we do in life that revolve around money. Much of the time we are working hard to earn more. Unfortunately, this desperation surrounding money doesn’t carry over to claiming our 401k employer match. People will do things out of character, work past the point of exhaustion, and even fall for obvious scams, all in pursuit of money.

Turning Down Free Money?

However, it seems like many of us are passing up free money with every paycheck! According to a recent study by Financial Engines, “39 % of [401 (k)] participants [are] not saving enough to receive the full employer match”! One of the most basic things that you can do is to quality for your 401k employer match.

The situation looks even worse for younger workers. The study reports that, “of participants under age 40, 47% failed to save enough to receive the full employer match.”

Most companies that offer 401 (k) plans will also offer a 401k employer match. What this means is that these companies will match the amount that you put into your plan up to a certain percentage of your salary. Let’s look at an example:

Let’s assume that your gross salary is $52,000 and you are paid every two weeks.You employer promises to match any contribution that you make to your 401 (k) dollar-for-dollar (100%), up to 6%!

You have more pressing concerns than saving for retirement, so you decide to start off slow at 1%. That means that with each paycheck you put aside $20 for retirement, and your company matches – giving you a total of $40!

Sounds pretty good, right? However, you just threw away $100 of FREE MONEY!!! How? Well, let’s take a look:

If you contributed 6% instead of just 1%, then your employer would match your $120 with $120 of FREE MONEY! Sounds a lot better than $20, huh? So, failing to contribute enough to receive the employer match (and only saving 1%), costs you $2,600 per year! Even more if you get a bonus, raise, or commissions!

I don’t know about you, but I would hate to have someone offer me $2,600 and I just light it on fire.

So, I guess you can see that I am in favor of everyone contributing enough in their 401 (k) plan to get the full employer match. If not, then you’re turning down FREE MONEY!!!

Actually, I’d go a step further and have every employee automatically signed up to contribute that amount, and have to opt out in order to change it. That would cause a lot more people to be aware of what their negligence costs them!

Want The 401k Employer Match, But Can’t Afford to Reduce Your Take Home Pay?

Keep in mind that a contribution to a traditional 401 (k) plan is made with pre-tax dollars. That means that taxes are not taken out of your pay until AFTER you make your contribution – leading to you paying less taxes!

Taking this example a little further will help us see this more clearly. Remember that I am making a few assumptions about your tax status in order to simplify the example:

Let’s say that your net pay is usually 25% lower than your gross, or $1,500. Contributing 6% of your salary ($120) will reduce your net pay to $1,410. This is a reduction of only $90 instead of the full $120 that you saved.

Actually, you managed to save $240 for your retirement by reducing your take home pay by only $90! That’s a return of 167% before you even started investing!!!

Is A 410k Employer Match In Your Future?

I hope you’ve read enough to convince you to take full advantage of your company’s 401 (k) match. The only thing worse than not getting the full match is using your 401(k) for credit card debt! Of course, in order to plan carefully you need to know the current 401k contribution limits, and even consider the prospect of a 401k rollover!

photo by AMagill

Reader Questions:

  1. Does your employer currently offer a 401 (k) plan?
  2. If so, are you contributing enough to get the full employer match?
  3. If you are contributing less than that, what’s your reason?

© 2010 – 2012, Khaleef Crumbley. All rights reserved.

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{ 16 comments… read them below or add one }

1 Nathan

I don’t contribute to my 401k at this time. It seems it is too good to be true and someone from Wall Street is going to steal it. I would rather have my money now then give it to hedge fund managers.

Going even further social security is going to go away because we can’t afford it especially when the boomers retire.

So with no 401k or social security what am I going to do? Me, along with my whole generation, are going to work til we die. We all know this and it is going to take one more scandal for someone to realize that their 401k’s are stolen.

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2 JoeTaxpayer

Not to rain on the parade, but this is a 167% return. Still a great number, and not to be passed up.

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3 Khaleef Crumbley

Nice catch, Joe! It’s 267% of the original investment, but only a return of 167%…thanks! I made the change in the article.

But as you said, we shouldn’t pass it up!

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4 Daddy Paul

Great article. I would like to add that if one is in a lower tax bracket that they may be able to take advantage of the saves tax credit which can provide up to a 50% tax credit on your contibutions!

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5 Khaleef Crumbley

Great point! I’m really glad that you mentioned it. I have encouraged low-income clients in the past to take advantage of this option, but I completely forgot it when writing this article.

Another great reason to save up for retirement!

Thanks for your comment.

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6 Kristen Simmons

Here’s a tip for people who think they can’t put more in their 401K. If you ever get a pay raise, instead of taking that extra money home, simply up your 401K contribution. You won’t miss what you never had right? I’m pretty close to maxing out my 401K using this method and I don’t ‘miss’ the money at all.

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7 Khaleef Crumbley

Makes sense to me…great tip! Very easy way to save for the future without reducing current consumption.

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8 Squirrelers

It defies conventional logic to just give away that company match. I would have to agree with you, and can’t think of much to defend it except some people might have cash flow issues or just can’t control their own spending. Which is too bad, really. Bottom line is it’s not sensible for most people to just forfeit the company match and not contribute to at least get that dollar for dollar match.

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9 Khaleef Crumbley

Yeah, I can’t imagine giving it away as well. I hope to never be in that much of a cash flow crunch that I can’t spare it.

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10 Lisa @ Cents To Save

Our company still provides a small match. In order to receive that match, we must contribute at least 4 percent, and they will then contribute 1 percent. It is not much, but it is better than nothing :)

When I get more of my debt paid down,I will increase my contribution to my 401k.

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11 Khaleef Crumbley

Yeah, that is small. But as you said, it’s much better than nothing! I have the same plan as far as paying off debt and then increasing retirement savings!

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12 Mark

Great article and timely. I am actually working on a post about why I not a fan of a 401(k)’s. You do a great job of illustrating the advantages of one.

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13 Khaleef Crumbley

Thanks Mark. I can’t wait to read your article. I’m assuming it has something to do with the lack of selection?

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14 retirebyforty

Khaleef, Very nice post on 401k. I like how you point out the pre tax nature of the contribution and crunched some numbers. When you pass up the match, you’re not just passing up the free money now, but the future earning also. That $2,600 could have turn into $50,000 down the road right. ;)

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15 Everyday Tips

Our 401k is our number one priority and is always fully maxed out. However, even people who appear to be financially savvy are nowhere near maxing their 401k benefits.

Great advice Khaleef!

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16 Khaleef Crumbley

Hey Kris, I figured that you’d have things in order! :-)

It is amazing to think of so many people that are refusing free money! It’s almost like getting a raise!

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