Recently, I’ve been helping a few people get a handle on their progress toward saving for retirement by doing a retirement projection for them. In these exercises, I have been struck by the power of the employer match, and so have those who got the projections. Of course everyone knows an employer match to your own retirement savings is a great benefit, but to see how it speeds up the growth of your balance year after year really brings the advantage home.
According to the Bureau of Labor Statistics, about 4 in 10 private sector workers in America work for a company that provides a retirement plan with some form of employer match. The typical match is 50 cents for every dollar the employee contributes up to 6 percent of their salary. That means that if you were to contribute 6 percent of your pay, your company would contribute another 3 percent of your pay, for a total of 9 percent of your pay going toward your retirement.
The following chart shows the amount of your salary you should be saving in order to have enough money to fund a secure retirement based on the age you start saving. For example if you start saving for retirement when you are 20, you can get away with saving about 11 percent of your salary. With a typical employer match, you would only need to save 8 percent of your salary, because your company is picking up the rest.
For those I’ve worked with, and for myself for that matter, the portion of account balances that were provided by the company match is substantial. Suppose you make $60,000 per year, and you contribute just enough to your retirement account to get the company match. Your contribution would be $3,600 per year in the first year, but would go up over time as you get raises. The following chart shows how your savings would grow if we assume your salary goes up by 2 percent per year, your investments return 5 percent per year for ten years and you get the typical company match.
Your account balance will be nearly double your total contributions. The following chart breaks down your projected account balance by source.
The company match is free money. It’s like getting an extra raise every year, and as you can see it can have a powerful impact on your savings. Yet, a 2015 study by Financial Engines, an independent investment adviser specializing in retirement plans, found that one in four employees don’t contribute enough to get the full employer match. Here are a couple of steps you can take to make the most out of your company match:
- Get the facts about your company plan. While the example provided is the most frequent matching scheme, there are unlimited possibilities. Your company may match only a portion of your contribution as in the example provided, or they may match dollar for dollar up to a point and then something less after that. For example, they may match dollar for dollar up to 3 percent of your salary and then 50 cents on the dollar on the next 3 percent. You need to contribute 6 percent in order to get the full match. Ask your human resources department for your plan’s details and an explanation.
- If you can’t let go of enough of your pay to get the full match now, take advantage of pay increases to increase your savings rate. Keep that going even after you get the full match, because its likely you will need to save more than just enough for the match.
In order to have a secure retirement, you have to accumulate a lot of money. There is no getting around it. You may be thinking that what you can save right now won’t be much help. But it can make a huge difference especially when combined with your employer match. While saving just enough to get the match may not be enough to fully provide a secure retirement, especially if you started saving later in life, at least you won’t be leaving money on the table. Your contribution combined with your company’s share and a reasonable rate of return will have your retirement account balance growing faster than you might have expected. It might even inspire you to save more.
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