« How to Get a Job By Asking For it! | Main | Sharebuilder Gets on my Nerves »
Are You Leaving Money on the Table?
By JLP | September 6, 2006
Let’s start with a sad fact:
A recent survey by Hewitt Associates found that only 31% of workers ages 18 to 25 who are eligible for a 401(k) participate in their company’s plan.
I found that fact in an older column by Sandra Block of the USA Today. The article doesn’t state whether or not the numbers change when a company match is offered. I’m sure a company match motivates some people to save. Regardless of whether or not your company offers a match, if you aren’t taking advantage of your company’s 401(k), you are leaving money on the table. How so? Let me show you with a simple example.
Let’s say you work for a company and your salary is $30,000 per year. We’ll assume that your company offers a 50% match up to 6% of your salary. So, in order for you to take full advantage of the company match, you must contribute 6% of your salary, or $1,800 ($30,000 X .06 = $1,800). Your company will kick in another $900, so your actual contribution to your 401(k) is $2,700. End of story, right? Wrong. Take a look at the graphic below:
Contributions.GIF)
Money that you contribute to your 401(k) comes off the top of your income, which reduces your taxable income. Using the brackets, exemptions, and standard deductions for 2006, I put together a quick hypothetical in Excel and found out that the $1,800 contribution to your 401(k), reduces your taxes by $270. So, the $2,700 that went into your 401(k) only cost you $1,530. That’s nearly a 2-for-1 match when it’s all said and done.
Granted, that $1,530 is money that can’t be spent. But, it only works out to $127.50 per month! What could that $127.50 per month mean for your retirement? According to my numbers, over a 40-year career, it could mean over $1,600,000! Using my Lifetime Savings Calculator, here’s how I arrived at my numbers:
I do make some assumptions. For one, I figure that you won’t stay at $30,000 per year forever so I included annual increases of 3% to the salary. Since the contribution amount is a percentage of the salary, it will increase when the salary increases.
One last thing, if you are worried about working 40 years, don’t worry. You don’t have to. You could bump up your contribution amount to 10% and reach $1,000,000 in about 32 years. Oh, and a 10% contribution will only cost you $212.50 per month after you factor in the tax savings!
BOTTOM LINE: Think long and hard before you leave money on the table. Yes, it might require some sacrifice on your part, but all good things require at least some sacrifice.
Topics: 401(k), Calculators, Financial Math Basics, Financial Planning, Retirement Planning, Taxes | 4 Comments »
September 6th, 2006 at 10:14 am
Unfortunately, my company doesn’t do matching. If it did, I never would have dropped my contribution level. I decided a few months ago to drop from 8% to 3% because I couldn’t see not putting anything away but I recognized that I need the extra money now to take care of current debt. If I’m still working here when I have everything paid off, I’ll bump it up to the max allowed. But until then, I need every penny I can get my hands on.
September 6th, 2006 at 10:15 am
Good stuff! I wish someone broke this down for me when I was 21.
September 6th, 2006 at 1:33 pm
I echo exactly what Ma said. I’ve been contributing the legal max for at least the past 12 years, but job changes have sometimes interrupted the plan – new employers often required waiting periods of up to 18 months before being eligible to join and most people change jobs every 5 years or so. And let’s face it, most people just are not inclined to start saving the max when they’re 21.
All in all, it’s a good idea to put as much in as you can (assuming you’ve established your emergency fund 1st), I just wish there was a way to put in even more, especially for a situation where there is a stay-at-home spouse, because these families need to save for two, but the legal limit is designed for one.
September 20th, 2006 at 1:22 pm
So true. So many of us young adults do not fully understand the importance of participating in a 401k, including other financial vehicles. We will not have the cusion of Social Security to soften our retirement woes, so we must do it ourselves.
Great article.