When it comes to contributing towards your retirement, a great strategy is to work towards maxing out your 401(k), 403(b), or 457 benefit. In 2018 the contribution limits are $18,500 per year and an additional $6,000 per year at age 50 and beyond. Often employers will also have a matching benefit to encourage their employees to save. For those of you who can max out their retirement savings and their employers have a matching program, it is possible to save too aggressively and end up leaving some money on the table. Read on to make sure you are getting the most out of your savings.
Typically, when an employer has a matching program it has a cap to it. For example, it is common for an employer to match the first 5% of your base salary. The matching benefit occurs each paycheck that you contribute to your retirement savings. For our example, we will consider a monthly paycheck but it works the same whatever your pay cycle is.
The issue that can arise if you are saving aggressively towards your retirement is that you can max out your benefit before the end of the year. Now this is a great thing that you are saving so aggressively and we will not discourage you from doing that. But it is possible that you are not making the most of your matching benefit by going too fast. Remember that the matching is capped out each paycheck and will only occur if you are saving. If you max out the benefit early, you will not be able to save in the later months of the year. If you don’t contribute in those later paychecks, you will also not receive the match. Below is an example of someone who saved extra aggressively in the beginning of the year but ended up leaving some of the matching benefit on the table.
In our example, this individual reaches the maximum in April and thus is unable to save anymore during the rest of the year and does not receive any additional matching. By spreading it out instead throughout the year, they receive the match every month. For this individual, the difference is $4,000 in additional benefit each year.
Now again this is for those of you who are maxing out their benefit and have a matching program. If you are not maxing out, your contributions already are spread out throughout the year and if you don’t have a matching program, then you are not missing anything. For those of you who are maxing out and want to figure out what the contribution rate is for you to spread it out over the year, it goes like this. You take how much you can save each year ($18,500 until you reach 50 when it becomes $24,500) and divide it by your base pay. In our example, we assumed the individual was under 50. That makes the math come out to $18,500 (max) and divide it by $120,000 (base pay). This equates to about 15.42% and that is the appropriate amount to save each paycheck. If you have any questions or would like a little help with the math, never hesitate to reach out to us.