Steve Coker, CFP
Making the most out of matching
A 401k plan is one of the best places to save for retirement. Payroll withholding makes saving easy, and more importantly, most companies offer some form of 401k matching. Unfortunately, many people make mistakes that cause them to miss out on matching funds. It is hard to overstate how important matching is to your retirement savings. It is literally free money. If your company matches dollar for dollar the result is an immediate 100% return on your investment. Even if your company only matches $0.50 on the dollar the result is a 50% immediate return. Here is how to make the most of matching.
The most important rule is to participate! As soon as you are eligible, contribute at least up to the matching amount. Because of IRS rules, most companies will offer matching on 401k contributions of least 3%, though some will offer matching on contributions of 6% or more. Read your benefits carefully since some companies will offer partial matching, such as $0.50 for every dollar that you contribute. These types of plans will require you to contribute at least 6% to receive 3% matching. Understand what you will need to contribute to the full company matching start right away. Sometimes clients ask whether it is best to pay down debt first or save for a house first. While everyone’s situation is different, it is almost always better to get the matching. Again, 100% return is hard to pass up!
The second rule is to contribute to the 401k for the entire year. Don’t skip paychecks and don’t max-out your 401k too quickly since you may be missing out on some matching. This rule sometimes surprises people, but most companies calculate the matching on a per paycheck basis. For example, assume that your company matches up to the first 6% of what you contribute to your 401k. If you contribute 20% of your pay on one paycheck you still only get matching up to the first 6% of your pay on that paycheck. If you skip a paycheck and make a 0% contribution on that paycheck then you miss out on the matching for that paycheck. Contributing more later will not make up the missed matching. Similarly, if you hit the maximum 401k contribution in September then you will miss out on matching for the remainder of your paychecks that year. If you are a strong saver and max out your 401k each year, then good for you but do the math to make sure you are contributing to your 401k for the whole year. The contribution limits for those under 50 is $19,500 per year or $750 per bi-weekly paycheck. For those 50 and older the contribution limit is $26,000 per year or $1,000 per bi-weekly paycheck.
Lastly, don’t be limited to the matching contribution. Just because your company only matches the first 6% of your 401k contributions does not mean you should limit your 401k contribution to 6%. Your 401k is still a great place to save and still provides significant tax benefits for retirement savings beyond the matching. If all you can fit into the budget is the matching amount, then start there, but keep adding to your contribution percentage as you get raises. If you have any questions on how much you should be saving, then give us a call, we would be happy to help.