A Massive Retirement Mistake

Vanguard releases tons of reports.  One of their regular ones is about saving in America.  Probably only of interest to nerds such as myself.  However, in their most recent report there was a fact that jumped off the page to me.  It is one I really hope you do NOT make!  What is it?   Let me say it involves leaving free money on the table.

So, here is the mistake - 1/3 of Americans do not put enough money in to their 401ks to get the full company match!  Seriously, this is free money.  Employers are willing to give it to employees, but many are not taking advantage of it.  That just floors me, although I may be a bit sensitive as I do not have an employer match as I’m self-employed.  

Now I get it, maxing out your 401k is difficult.  Not everyone is in a position to put in $19,000 a year, or $25,000 if you are 50 years old.  However, odds are you do not have to max out your contributions in order to get that full company match.  Actually, I’ve never seen an employer plan that says you have to max out in order to get any type of employer match.  Most plans are set up so if you put in as little as 4% you get some kind of employer contribution.

For example, let’s say your employer plan is set up so they match 3% on the first 6% you put in.  Let’s assume you make $50,000 in this same scenario.   If you put $3,000 in your 401k over the year your employer will put in another $1,500.  

This is free money to you.   By maxing out this match you have increased your contribution by 50% from $3,000 a year to $4,500.  That’s a hell of a return.  Tell me what other investments have a guaranteed 50% return in a single year!

Yeah, there are rules about how long you have to stay or other conditions you have to meet so this employer match is fully yours.  However, everything you put in is always your money.

Again, I know making contributions to your 401k plan can be difficult as there are more important things to spend money on, such as housing and healthcare.  However, in this case, it may be worth skipping Starbucks or packing your lunch if those costs are the difference in getting that free money.  And please never use the reason of “I hate my employer” as justification for not contributing to your 401k to get that match.   Yes, I have heard that plenty over the years.  I mean, if you really don’t like your employer, wouldn’t you rather get their money?

So, please do not make this huge mistake that 1/3 of Americans are making by leaving free money from your employer on the table.  In case you want to hear me say it again, I’ve recorded a video about this topic.