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It’s hard to estimate how much money you’ll need for retirement when that milestone is many years, if not decades, away. But no matter what your lifestyle ends up looking like and costing in retirement, it’s important to build up a nice nest egg ahead of time.
Social Security will generally only replace about 40% of you pre-retirement earnings, and that assumes you make an average income. Since seniors commonly need a lot more income than that to live comfortably, it’s imperative that you build savings — and that’s where your 401(k) plan comes in.
The great thing about 401(k) plans is that employers commonly match contributions to these accounts. That doesn’t mean they’ll match every dollar you put in. But if your company will match up to 100% of your first $3,000 in contributions, for example, it means you have a chance to snag a free $3,000 each year.
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The problem, though, is that some people don’t put enough money into their 401(k)s to claim their employer match in full. And that’s a mistake you might regret.
In a recent report by Bank of America, only 61% of employees are contributing enough to their 401(k) plans to maximize their employer match. That means 39% of savers are giving up a chance to score free money for retirement.
Now on the one hand, it’s easy to see why some people may be struggling to fund a 401(k) this year. Inflation has been soaring, and a lot of people have had to scale back on both spending and savings just to keep up with their essential bills.
But if you’re in a position where you can fund a 401(k) to a reasonable degree, then it’s important that you do so — even if it means having to spend less on some of the things you enjoy. If you pass up free money from your employer, you might end up falling short on income once retirement rolls around.
Remember, when you give up an employer match in a 401(k), you don’t just forgo that principal contribution. You also lose out on the opportunity to invest it and grow it into a larger sum.
In fact, let’s imagine that age 27, you give up a $3,000 employer match in your retirement plan. If you were to invest that $3,000 over 40 years in time for a retirement at age 67, you’d end up with a little over $65,000, assuming an 8% average annual return in your 401(k) plan (which is a bit below the stock market’s average).
So all told, passing up free money could have big consequences. You might think you’re only giving up a few thousand dollars when in reality, you could be denying yourself many thousands of dollars down the line.
Snagging your employer match in your 401(k) could mean having to make some modest sacrifices, like spending less on the things you love or even working a second job. But remember, you don’t get that many opportunities in life to walk away with free money. So it pays to push yourself to get those matching dollars while they’re available to you.
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