The #1 Tip to Help Maximize Your 401(k) Investing

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401(k) written on a notepad with $50 bills on a table
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We all have retirement goals. But did you know there’s one really easy thing many of us can do to speed up reaching those goals?

Make Sure You’re Doing This in Your 401(k)

When your employer puts money into your 401(k), that “match” becomes yours to keep as long as you’re contributing money, too.

401(k) matches aren’t required by law, but they are a fairly common benefit offered by a lot of employers.

The level of employer match varies by workplace. At many companies, the employer will match 50% of a worker’s contribution — up to a certain percentage of that employee’s contribution. So, for example, if you contribute 6% of your gross annual salary to your 401(k), your employer will contribute an additional 3%.

It becomes free money that’s yours to keep!

“The beauty of an employer match is that it’s the equivalent of an automatic pay raise,” money expert Clark Howard says. “No need to ask your boss, get a good quarterly review or hope your company has a good year so there’s money for a raise!”

If you do not put in enough money to get the full match from your employer, Clark says it’s time for a re-evaluation in your own head:

“Tell yourself, ‘I’m doing a good job, so I deserve a raise. And my employer will just nod and agree!’ Then simply change your contribution rate — either during open enrollment or any other time when you’re allowed to — to pick up the full company match.”

Clark’s Rule of Thumb for a Secure Retirement

To have a secure retirement, you want to save at least a dime out of every dollar you make during your working lifetime.

Maybe you’re saving zero right now and 10% seems like a bridge too far. Clark has talked about his “baby steps” approach to saving. It starts with saving just one penny (1%) out of every dollar you make and gradually stepping it up from there. That’s a great way to ease yourself into a savings habit.

After 10 years, you’re saving 10% and you probably didn’t even notice the money missing from your life because the change was so gradual.

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The maximum amount you can contribute to your 401(k) typically changes every year. But note this: Your employer match does not count toward that maximum.

If you’re 50 years old or more, you can make additional “catch-up” contributions — above and beyond what younger people can contribute.

A Look at How Picking Up the Employer Match Adds Up

Picking up the full employer match on your 401(k) can really add up over time. We ran some simple numbers to illustrate the point.

In our first example, a worker who’s earning $60,000 a year is saving 10% of their gross income. The employer matches 50% of the employee’s contribution.

So the total monthly contribution to the 401(k) is $750.

John Hancock Employer Match Calculator showing employer match of 50% on the first 10% of contributions
John Hancock Employer Match Calculator

Compare that with a worker at a different company who earns the same salary and also contributes 10% of their gross income. But this employee’s company does not have a company match.

John Hancock Employer Match Calculator showing how retirement savings grow for an employee who does not get any employer match.
John Hancock Employer Match Calculator

The end result is the employee without the company match is socking away $250 less for retirement every month. Over the course of just one year, that’s an extra $3,000 they’re missing out on!

What Should I Do if My Company Match Is Going Away?

Some employers are trimming their matching 401(k) contributions because of economic fallout from the coronavirus pandemic. But if you work for one of those companies, don’t despair! The median length of a freeze on matching contributions following the 2008 financial crisis was just 12 months, according to a survey cited in The Wall Street Journal.

So if your employment is stable, Clark advises you to keep investing as normal even if your match goes away temporarily. Read our article on that for more details.

What if Your Employer Doesn’t Offer Any Retirement Plan at All?

It’s estimated that more than a third of workers at private companies have no access to any retirement plan at the workplace, according to data from the Pew Research Center. This is especially true if you work for a small business.

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If this describes you, you’ve got to find a way to save on your own. Clark recommends two particular savings vehicles to get the job done:

  1. SEP (simplified employee pension) IRA
  2. Roth IRA

A simplified employee pension (SEP) IRA works like a traditional IRA or a 401(k), with a current year tax deduction, but withdrawals are taxed at retirement.

The paperwork to set up a SEP IRA is simple and you can typically open one for free. SEP IRAs are available to self-employed individuals and small business owners.

The other option is to open a Roth IRA.

“A Roth IRA is the most efficient place for you to have money grow for your retirement because the money in it grows tax-free and is spent tax-free,” Clark says. Here’s a primer on Roth IRAs to get you started.

Final Thought

Picking up the full employer match can really help speed you along toward your retirement goals.

In the final summation, you can either start saving money now or face the fact that you may not get to retire. But retirement is a relatively new concept in human history, according to Clark:

“The idea of a government-provided old age fund or pension goes back to Germany in the 1870s,” he says. “The idea that you’d put in your time and then have your latter years to just have fun soon spread across Western Europe, before eventually coming over to Canada and the U.S.”

If you have additional investing questions, reach out to our Consumer Action Center.

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