If you see $5 on the ground, you snatch it up, of course. Maybe you look around to see if someone may have dropped it before you claim it as your own.
But according to new Vanguard survey, getting free money is something that 401(k) investors are not doing. Specifically, the report says that 34% of 401(k) holders are not giving enough to get their full employer match.
Employer match refers to the money your employer puts in your 401(k) for free. To get the complete amount, you must give your own contribution up to a certain percentage. So, in terms of the money on the ground, you would throw down your own $5 bill first. Then you can get your $5 back plus another $5.
How the match works
Each company defines its own formula for matching, usually with two details:
The cap is your company’s maximum contribution. Normally a percentage of your salary. Vanguard says most caps are between 3% and 6% of salary.
What it’s really worth
You might run the numbers on 6% of your salary and not be impressed. But when you review the value of your employee contributions over time, this shows you the impressive reality. For example, with only a 3% contribution in 30 years and a salary of $45,000, the ending value is $127,500.
Get your free money
Employer contributions can easily give you six figures of free money to your retirement over time. Taking advantage of this is as easy as picking up random $5 bills.
Ask your 401(k) manager to go over your company’s matching formula. Then increase your contribution to whatever is needed to claim your full match. And just like that, you will be in the group of 66% of 401(k) investors who are doing it the right way.
Author: Steven Sinclaire