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Are you ignoring totally free money from your employer?
Sounds crazy, I know, but this happens all the time! Most people don’t even realize there’s free money available. But once you know, you can’t ignore it.
Today we’re going to talk about this free money. What it is, how much it can be, and how to get it.
So what is this free money we’re talking about? It’s a little program called contribution matching.
What is Contribution Matching?
Contribution matching is when your employer contributes to your retirement account (like a 401(k)), as long as you contribute to your own account.
For example, your employer might contribute $1 for every $1 you contribute up to a certain amount of money or a certain percentage of your income.
How Much Are We Talkin’?
The exact amount depends on your employer, but here are some average numbers…
According to Investopedia, the most common contribution matching program is 50 cents for every dollar you invest up to 6% of your income.
Let’s do some math…
What if you make $40k/year (the average US salary for 25-34 year-olds) and your employer offers that common 50-cents-to-6%-match?
Well, if you contribute the maximum match of 6% of your income to your 401(k), you’d be investing $2,400 per year (btw, you can totally invest a higher percentage of your income in your 401(k), it’s just that those funds wouldn’t be matched under this average contribution matching plan). So if your employer matches 50 cents on every dollar, they’ll contribute $1,200 per year through the contribution matching program.
But that’s just the beginning. Remember, you’re investing this money for retirement, and by the magic of compound interest, you make money on the money your money is making. So in addition to this $1,200 per year, you also get to keep all the interest this money earns. Plus all the interest that interest earns.
Let’s say you stay at that job for 5 years, collecting $1,200 per year in employer contributions (for simple math, we’re going to say you don’t get a raise that whole time – sorry!). The total amount your employer would have contributed is $6,000 ($1,200 per year times 5 years). But if your retirement investments earn an average of 7% per year (a reasonable rate), that $6,000 will turn into $43,556.16 by the time you retire 30 years later!
And that’s just your employer’s match. On top of that, you’re saving $2,400 per year, remember? So over 5 years, you’ve saved $12,000. Assuming that save 7% average return, that $12,000 turns into $87,112.32 by the time you retire!
If you’re following along, you can see that you end up with $130,668.48 for retirement. And all of this came from your investment of just $2,400 per year for 5 years plus your free money from your employer contribution matching.
AND…this is just 5 years of your career. These numbers are assuming you don’t contribute a single penny more to your retirement after those 5 years. What happens then when you keep contributing to your retirement account in the same way, year-after-year, for a 30-year career? Then you’re looking at more like $366,000 my friend!
How Do I Start Getting These Employer Contributions?
First, you need to have an employer who offers contribution matching. If your current employer doesn’t, then put this toward the top of your list of questions for future employers. Right up there with salary and schedule.
Once you have an employer that offers contribution matching, you just need to enroll in your employer-sponsored retirement program and start contributing.
Here’s what’s great about these employer-sponsored retirement programs (in addition to all the money): your contributions are automatically withheld from your paycheck. So you never have to remember to move your money from your primary checking account to your retirement account. You just go about your life while your retirement account grows. This is how people become accidental millionaires.
Another great thing about this retirement account? It’s tax-advantaged. Which is the fancy-pants way of saying you get tax breaks on this money. Most employer-sponsored retirement accounts are pre-tax. That means you don’t pay income taxes on the portion of your income that you contribute to your retirement account.
In the distant future, when you’re retired and living off this money, it will be taxed as normal income, but by then you will have used all that pre-tax money to take advantage of compound interest, so you’ll come out ahead as long as you start contributing while you’re on the young side.
If you don’t know how to enroll in your company’s retirement plan, simply contact your HR Rep for instructions.
And to make the most of your retirement account, make sure you’re investing the money in your retirement account; not just saving it.
When Do I Actually Get the Money?
Technically, you should wait until you retire before you actually access the money. If you take the money from your retirement account before the legal retirement age, you’ll pay harsh taxes and penalties. But, this doesn’t mean that you won’t get any benefit until you retire. You’ll start benefiting from employer contributions right away. Hear me out…
Every dollar your employer contributes for you this month is money you don’t have to contribute yourself. So you can afford to save less of your current paycheck for retirement, which means you can spend that money as needed this month instead of saving it.
Now that you know about this free money, you can’t afford to ignore it! Get out there and take advantage of contribution matching asap!
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