Being a financial planner for several years you think you’ve heard them all. Several years ago I was able to talk to individual who worked for a Fortune 500 manufacturing company. He was in his early 50’s and had been with the company for well over two decades. The company offered a decent pension plan and had just implemented a matching 401k about 8 years prior.
401k, What’s That?
The gentleman was offered an early buyout due to his company being merged with another and he was exploring his options. He made decent money and informed me of the cash buyout that he was being offered for the pension. Knowing the company had a decent 401k, I inquired to the balance he had accumulated. Here comes the bomb……nothing. Not one single dollar. Maintaining a straight face, I asked the simple one word question, “Why?” His response was, “I don’t invest into that stock market”. Knowing that his company matched dollar for dollar for the first 3% and then fifty cents on the dollar for the next 5%, I was in shock. I didn’t know what to say, so I didn’t say anything and just moved along with rest of the meeting.
Still In Shock
I’ve never forgot that conversation and made me wonder how many more people out there have matching 401k’s that don’t take advantage of them. Did he not know that his 401k had a money market option? He could defer 8% of his salary and not have to worry about the “stock market” and get free money from his company. Since my encounter with him, I make the diligent effort to ask anybody I come across that has a 401k if they are taking their free money. Even if they are not putting their money in the market, they can least take the match. That’s more return that they’ll get in their savings account any day of the week.
Understanding the Match
Using the example above, let’s say you work for the same company and make a salary of $50,000. In that case if you were to put 3% of your salary ($1500 for the year) then your employer would match another $1500. So you just doubled your money and now have $3000 saved towards your retirement. If you then save an additional 5%, that would be $2500 plus the company would match half of that for $1250. So if you were utilizing the full 8% of your salary, your own money that you would contribute would be $4000 and your employer would tack on $2750 for a total of $6750. Not including any market fluctuation, that is a 68.75% return on your money! And how much do you make if you don’t participate in the 401k. O. Zilch. Nada.
So go out and participate and take your free money and run off to a comfortable retirement!