Don't Leave Free Money on the Table

Saving money can be a hard habit to start. We all want to save more, but the cost of living these days can make it difficult to be sure. That's why making a realistic budget and sticking to it is so important. But putting it on paper and living by the budget are two different things.


That's why any extra little bit of help is generally, and often happily, accepted. It's surprising then to see a fairly large number of people not taking advantage of their company sponsored retirement plans. According to a recent Vanguard study, only about 76% of eligible employees participate in their retirement plan. That leaves nearly a quarter of employees not utilizing these tax-deferred retirement savings plans.


In addition, about 34% of the ones that do participate are not contributing up to the company match, in essence leaving some extra free money on the table. If a company wants to give you extra money that you don't have to pay tax on right now, why not take advantage of it?


How much can that match grow?


To illustrate how much money could be getting left in your employer's pocket instead of getting put into your own, let's go over a quick scenario. Say you make $60,000 a year. That's $5,000 a month in gross earnings. A fairly common match for companies is 3%-5%. In order to get that match, you must participate in the plan and contribute up to their match to get the full match. Say they will match up to 5%. That is $250 a month they will put towards your retirement, if you put $250 in yourself.


So if you contribute $250 a month out of your salary, your company will give you an extra "free" $250 a month as well. Mind you this money is still yours. You're saving it for your future self, and in the meantime you are lowering your taxable income, which is an additional savings.


For simplicity, let's say you work for 25 years and get the $250 a month match each month for the whole 25 years. How much would that add up to? Assuming you can get an 8% annual investment return, after 25 years the matching contributions alone would add up to a little over $239,000. Keep in mind this is just the matching amount, the "free money." This does not include your portion, not to mention any increase in your salary over time which would therefore increase the 5% matching amount.


Make the best of your options.


Going over this from time to time and analyzing your situation should be a priority. Saving money can be hard, but when given the opportunity to take advantage of these retirement plan perks, you can't argue the math. It's a win-win for the employee. Extra savings, and tax-deferred.


Don't give up that free money. Take advantage of your company's retirement plan. If they offer a match, then contribute at least that amount. Preferably, you should be contributing 10%-15% of your gross income yourself. But if you can't do that much now, anything is better than nothing. And if you don't have a retirement plan through work, look into starting your own with a traditional or Roth IRA.



Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. Our investment philosophy takes a forward-looking approach that may not transpire. The economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Investing involves risk and you may lose your principal.




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