Get the match. Get the match. For all that is good in this world, Get. The. Effing. Match.
I see this advice at LEAST 5 times per week, and it’s
good great advice. Please do GET THE MATCH. But I think it is putting an unusually large focus on one of the (if not THE) smallest benefits of the 401K.
Setting this post up……..
Last week we were at a company meeting and the big boss dropped a mini-bomb on us right before the lunch break
“Starting in 2018, we will be doubling the employer 401K Match”
By far the biggest response from the crowd all day, celebrating a 1.5% tax-free raise that we weren’t expecting. Okay, maybe I was the only one thinking “Tax-Free” but everyone else was excited along with me.
And Yes, for the people that already did the math, our previous match was a poopy 1.5%. Now we’re at 3%, which feels more respectable and in line with our industry standard.
As the cheering faded (no joke, we cheered), I heard this from the guy directly behind me
“Oh, now that they are doubling it, it might be worth actually doing it”
Initial Reaction: Chair flip and death stare
But looking back at all the advice I see about “getting the match” if the match isn’t perceived to be worth it I understand why someone wouldn’t invest in their 401K.
The 401K Sundae
I am going to try and put all the 401K benefits into perspective. We need to shift the mindset. There is much, much more than the match.
I will use 3% as the average match based on this article from Investopedia:
“About 40% of companies contribute 50 cents for every dollar employees contribute up to 6% of their pay. Another 38% match employee contributions dollar for dollar, but the maximum is normally lower – commonly 3%” – Investopedia, Read more: What Is a Good 401(k) Match?
Sample Family for all examples below: Married, putting away 6% with a 3% match, $100,000 combined income
Investment Gains (Bowl)
The humble bowl, doesn’t get the credit it deserves. And just like the bowl, the investment gains don’t get the credit they deserve as the base of the 401K. Your contributions will generate the biggest returns over time, but they get demoted to glassware because you can get investment gains in a bunch of different places.
Hard to pin down the actual amount this will be, and it could vary greatly depending on your allocation and years left to invest. Since I like numbers, will look at a few projections.
Putting 6% away each year for the below time periods at an 8% average gain
- 10 Years – 401K Balance $99,873 ($66,000 Contributed, $33,873 Investment Gains)
- 20 years – 401K Balance $302,538 ($126,000 Contributed, $176,538 Investment Gains)
- 30 years – 401K Balance $740,075 ($186,000 Contributed, $554,075 Investment Gains)
Tax Savings (Vanilla Ice Cream)
Sorry Tax Savings, you are super cool and all but I can’t let you be something sexy like the whipped cream……
They are an overlooked and IMMEDIATE benefit of using a 401K though. You start saving on the tax bill from day one. and you can think about this as saving on your income that is taxed the highest since anything you contribute comes straight off the top.
Running a few numbers based on our example family above (includes the standard deduction for a married couple):
- 6% Match – Saves $1,230/year
- 10% Match – Saves $1,830/year
- 18% Match (Maxed 401K) – Saves $3,030/year
- If both partners can max out their 401K, You Save $5,730/year
Right out of the gate, tax savings compete with the employer match of $3,000. Especially if you are able to max out your 401K (which on 100K combined income is a real possibility). The more you make, the more impactful tax savings can be.
In this example, combined with the standard tax deduction none of your money would be taxed at the 25% tax bracket.
If you made $150,000/year combined and both maxed out your 401K it would save you $9,000!
*I used this calculator to run the numbers, your situation will be different. I kept it pretty simple for this example, but taxes rarely are.
Investment gains on Tax-free money (Hot Fudge)
The Tax-Savings get sexier when they are left alone to compound for a long period of time in a sleek index fund.
Using the tax savings of maxing out a 401K ($3,030) every year*
- 10 years – $17,106 in Investment Gains
- 20 years – $89,151 in Investment Gains
- 30 years – $279,808 in Investment Gains
Remember these are gains on the $ that would be going to the government. That is why it is hot fudge and not cold chocolate syrup.
Ideally, when you actually start to pull this money out many years down the road you will be in a lower tax bracket than you are during your earning years. No one knows what the government will do, but I operate on what I know today and the 401K makes sense.
Gains on the employer match (Whipped Cream)
How can we talk about the gains on the employer match before we even talk about the match?
Because. Even if the match is small (for example the 1.5% I was getting before the change) the gains by the time you retire will not be. Hows that for some whipped cream?
I am not going to run the numbers on the employer match because they will mimic the gains in the previous section ($3,030 if you max out one 401K account).
Employer Match (Cherry)
In my life, I have seen an actual cherry on top of a sundae maybe 1 time. Why? Because they are a completely unnecessary component. I don’t need a fruit messing up all the greatness that happens below it. Just like I don’t NEED a match to rock the hell out of a 401K.
The employer match makes the previous step possible, we take $3,000 when it is offered up, but not everyone has it available to them. Does that mean they should ignore 401Ks?
Let’s not pretend we wouldn’t eat ice cream with hot fudge just because some whipped cream and a cherry were missing.
That is how I want everyone to think of the employer match. Yes, it is free money that we should gladly take, but even without it, this is still a sweet fricken deal!
Sundae > Cherry
401K Benefits > Employer Match