There is good news and bad news on the 401(k) front. The good news is that about 80 percent of Americans who have access to them are taking advantage of 401(k) matching programs, according to a 2016 report. The bad news, however, is that another report released just this month found that Americans are not really using their matching program to its full advantage. In fact, they are leaving $24 billion in company match funds behind each year. Here's what that means for you individually.
How much retirement money are you leaving on the table?
What Does $24 Billion Mean for Me?
That's a huge number to digest. Here's how researchers arrived at it. They examined the retirement funds of 4.4 million participants from more than 500 companies. Twenty-five percent of those participants were not contributing enough of their own money to their 401(k) to take advantage of the company's full match. $24 billion averaged out to about $1,336 in uncollected employer match funds each year. Over 20 years, the missed funds could add up to over $42,000 per employee.
Here's another way to look at it. Let's say you work for a company that matches 50 cents on every dollar you contribute. If you invest six percent of your $50,000 salary, that's $3,000 per year you are contributing and $1,500 per year your employer is giving you. In effect, you are getting a tax-free, $1,500 raise.
How Much Is Enough?
"How much should I be contributing?" is probably the most common question asked of financial advisors. However, the answer is not always straightforward. "As much as you can" is the simple answer, but that leaves room for a lot of interpretation, and is sometimes a cop-out. Each situation is unique. For example, a 40-year-old that has never contributed to a retirement plan needs to start saving fast, contributing at least 15 percent. There are restrictions, though. For 2015, employees are allowed to contribute up to $18,000 annually or an extra $6,000 if they are over 50. Conversely, a recent college graduate starting his or her first real job at 22 can afford to start at a lower percentage. A good rule of thumb is to contribute at least the maximum that can be matched. Most companies that offer matching will only do so up to a certain percentage of your salary. You want to at least contribute enough to maximize that match.
The best way to accurately assess how much you need to contribute is to talk to a financial advisor that can come up with an overall retirement strategy that includes your 401(k) and other resources available. While a 401(k) is nice in that it does not need constant attention, you should monitor your growth periodically and talk to your financial advisor to see if you are on track. For example, it's generally recommended that your 401(k) include at least one year's salary by age 30. How much could that end up being? If you had $40,000 in your 401(k) by age 30 and never added any more money, you would have $600,000 by 65, figuring an average eight percent annual return. That amount will only grow with increased contributions.
A financial advisor can help you ensure you're taking full advantage of your 401(k) matching program.
Who's Most at Risk?
Researchers also examined what demographics are missing out the most and what factors contribute to employees' financial decisions. Here's what they found.
- Young employees are missing out. Employees under 30 are twice as likely to miss out on employer match programs than employees over 60. This isn't necessarily because they don't see the importance. Many young adults have endured unemployment, as well as massive student loan debt. According to USA Today, 40 million Americans are carrying $1.2 trillion in student debt -- any extra each month likely goes toward paying that down. Graduate students may still be attending school, balancing the increasing cost of tuition with supporting themselves.
- Lower salaries = lower matching. Forty-two percent of employees earning less than $40,000 annually were not taking full advantage of employee matching, compared to only 10 percent of employees earning over $100,000 a year. It's understandable that those that make more can contribute more. However, remember we are talking percentages. As illustrated above, even small percentages will grow exponentially over time. Waiting until you start making more is not an effective strategy. You will lose thousands in "free" matching money.
- Middle-age poses new obstacles. The research showed middle-aged employees decreasing contributions. This stage in life often brings new expenses, including the cost of raising children and saving for their college funds. However, the point is that every stage in life presents challenges to saving. Middle-age is not the time to decrease contributions and lose out on valuable employer matching.
- Getting an advisor matters. Employees across all demographics were less likely to miss out on employer contributions when they worked with a financial advisor. For example, among employees earning $20,000 a year, only 18 percent that worked with a financial advisor were still not taking advantage of employer matching. Among the same income bracket, 48 percent that did not get advisory services were not reaping the rewards of employee matching.
Regardless of your income level, age or industry, resolve to take full advantage of your company's retirement benefits today. Start by gaining an understanding of your plan. How much does your employer match your contributions? Are you leaving money on the table? Commit to regularly increasing your contributions. A good time to do this is with each year's raise. Lastly, get professional help. Your 401(k) should be just a piece of your retirement strategy. Let an experienced advisor help you create a customized plan based on your retirement goals and your current financial situation.