Generations ago, pensions were the standard retirement plan. As long as you put the time in at your job and the company stayed in business, you were promised lifetime benefits once you retired. In other words, your employer took on most of the responsibility of retirement planning for its employees.
Today, that's shifted, primarily in the private sector. Most companies have eliminated pensions in favor of 401(k) plans.
The good news is 401(k) plans have various perks and benefits, and people can build generational wealth if they use them to their full potential. However, unlike a pension, a 401(k) puts individuals in charge of funding and managing it. If you neglect your 401(k) plan, you'll risk financial troubles later in life if your nest egg is insufficient.
I'm not here to tell you in detail how to manage your 401(k). Everyone's retirement planning journey is unique. You're already on the right path as long as you're actively contributing to your account.
That said, there is one tip everyone should use if their 401(k) offers them the opportunity to do so.
Want some easy money?
A 401(k) isn't just a savings account -- it's an investment account. Your money will generate a return and grow depending on your investment choices.
Most 401(k)s offer various options so you can tailor your portfolio to your needs, age, and risk tolerance. But what if I told you there was a guaranteed way to earn an instant, substantial return on your contributions?
I'm talking about the company 401(k) match. Many employers offer it as an incentive to encourage people to use their 401(k)s. It's usually a percentage, such as 50% or 100% on top of what you contribute, up to a specified percentage of your salary.
For example, suppose you make $60,000 and your company matches your 401(k) contributions dollar for dollar, up to 5% of your pay. In this scenario, you could contribute $3,000 and your employer would kick in an additional $3,000. That would be a total of $6,000 going into your 401(k) each year. Since only $3,000 came from your pocket, it's as if you doubled your money before you even invested it.
Each employer's match program is different, but the concept is the same. Some employers might have a vesting period, meaning you must stay at the company long enough to keep the matched funds. You can consult with your employer about the rules and policies of your specific plan.
The bottom line? Everyone can and should contribute enough to their 401(k) plan to maximize their employer's matching contributions.
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The difference a match makes
Remember that the more you invest, the more money you'll likely have when you retire. Yet many people fail to grasp the powerful math behind this concept.
Going back to our previous example, assume you make $60,000 per year and contribute 5% annually to a 401(k) starting at age 30. If you keep up this habit until retirement at 67 while averaging an 8% annualized return on your contributions, you would retire with about $680,000. That's a sizable nest egg.
Now, factor in a company match. Imagine your job matches dollar for dollar up to that 5%, so an extra $3,000 goes into your 401(k) each year. With the same timeline and rate of return, you would instead retire with over $1.3 million.
And most companies that offer 401(k) plans also offer a match. Still, a 401(k) match at employer A could be better (or worse) than employer B, so pay close attention to the details of your plan. Two jobs may pay similar wages, but a better match could help you generate thousands of dollars in additional retirement savings over the years.
A company match can be a game changer for your retirement, even if you're not a high earner. It seems like a no-brainer, but according to one study, roughly 1 in 4 employees don't max out their 401(k) match. Avoid leaving this money on the table, and your future self will appreciate it.
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