Why Employer Retirement Matching is Like Getting 100% Return
Everyone is searching for that “great” investment and jumping at the next opportunity to become a millionaire. Yet more than 20% of Americans are missing out on the best way to get a 100% return on your investment - through employee matching. Imagine if someone told you that they would match you dollar for dollar into your retirement account which would basically double your money for free. Wouldn’t you take this opportunity? Your employer is giving you free money for retirement, and no other investment can give such a guaranteed return.
How does employer matching work?
An employer match is a contribution made by your company to your workplace retirement plan (such as a 401k plan). The ranges can vary (and some employers don’t offer matching at all), so it’s important to find out what your employer does offer. If your employer does offer matching, they are saying that they will match (up to some limit) the amount you contribute into your retirement account. If you don’t participate then the employer will not need to make any contributions on your behalf.
What is all the fine print like vesting or match schedules?
There are different ways that an employer can set up a matching plan. The most common employer match is a 50% match up to 6% of your salary - this means that for every dollar the employee contributes, the employer will contribute $0.50 but only up to 6% of the employee’s salary. This basically means that if the employee contributes the full 6% of their salary, the employer will match 3% of the employee’s salary. Another common type of matching might match 100% up to 3% of your salary and then 50% from 3% to 5% of your salary. This would means that for every dollar the employee contributes up to 3% of their salary, the employer contributes $1 For every dollar the employee contributes up to 3%-6% of their salary, the employer contributes $0.50.
Vesting is when the employee matching program comes with a vesting schedule as an incentive to stay with the company. Even though your employer will begin making contributions to your retirement, you won’t necessarily have access to the money immediately when you leave. The vesting schedule (usually over a few years) will determine how much you can get at any point.
Can you walk me through an example?
For example, Susan has employer matching of 50% up to 6% of her salary and she is on a three year vesting schedule. If Susan has a salary of $50,000 and contributes the full $3,000 into retirement in a year, she will get another $1,500 from her employer. She continues to contribute the same amount for the next three years. If she leaves after two years (when she is 66% vested) she will have ~$2,000 from her employer and $3,000 she contributed or ~$5,000 saved for retirement. If she leaves after the third year (when she is 100% vested) she will have $4,500 from her employer and $9,000 she contributed or $13,500 saved for retirement!
Here are two real life examples:
Google offers a 401(k) plan that matches 50 percent of the employee’s contribution, up to $8,250. So if you put in $5,000, they put in $2,500 into your retirement.
Citigroup matches 100% of the employee’s first 6% of contributions (that means if you contribute 6% of your salary to your retirement, they will match it = 100% returns!).
How do I maximize my employer matching?
If your employer does offer a matching program, you should make sure to save enough money each pay period to maximize that match (or the contribution limit). At the end of the day, employer matching is like rolling the dice and winning every time so why not take advantage of this special perk? You should contact your employer to find out details about your employer matching program ASAP!