Take Your Employer's Money. It's FREE!
If there's one financial decision that every single person needs to make, it's this... Always contribute to your 401(k) if your employer matches it.
Never underestimate the power of a 401(k) account. A 401(k) is a retirement account that your employer sponsors and manages.
Our employer matches half of an employee's contributions up to 6% of his salary. That means if the employee sets aside 6%, the employer adds 3%... for a total of 9%. That's an instant 50% return on your money...
Let's look at an example to see the power of compound interest:
John just started a job with the city. His starting salary will be $36,000. The rule of thumb is to save at least 10% of your salary to generate a well-balanced portfolio at retirement.
So, in this case, John will be contributing $300 per month for a total investment of $3,600 each year. We will hypothetically say that he'll be employed with the city for 20 years and his annual return on his 401(k) investments is 10% (average annual S&P500 return).
Our calculations results: John would have accumulated approximately $226,809 after 20 years of service. Not too bad!
Well, let's see what his final tally will be when he takes advantage of his employer's match. The city will match half of John's contributions up to 6%. Although John is contributing 10% annually (in which is more than 6%) to his 401(k), the maximum match he can get from the employer is 3%. He can't any higher than 3%.
Now, let's see what his account will look like in 20 years after adding the additional 3% FREE company match:
John Employer Match Total Monthly Contri. Annual Return # of Years
$300 $90 $390 10% 20
Total 401(k) Balance = $294,851.70
John will have more than $68,042 in his 401(K) after 20 years because of the employer match. Can you imagine workers that do not participate or contribute to their 401(k) at work. They are missing the boat!
Not participating in your employer's retirement plan and essentially skipping out on FREE money (employer match) are the worst mistakes any employee will encounter in retirement planning.