You make $100,000 per year. Your company will match 100% of your contributions up to 6% (By the way, if that’s what you have, that’s a real good plan. According to a 2014 PlanSponsor.com survey, less than 10% of 401k sponsors match 6% of salary). You contribute 4% of your salary or $4000 per year for a total of $8000 per year including the company match. Not bad, except for the fact that someone is offering you $2000 per year and you’re
walking away from it. How’s that? Well, your company’s match is predicated on you contributing the same amount, so since you decided to contribute 4% instead of 6%, your company contributes 4% instead of 6%. Over a 20 year career and assuming a 7% return rate (assuming you get no raises for the next 20 years), you’re leaving almost $90,000 on the table just based on the company match. I get it, you need current income and can’t afford to allocate the $167 pre-tax per month, or $77 per pay check pre-tax if you get paid bi-weekly. After tax, that $77 is probably around $65 in your pocket. So instead of paying yourself and letting your company double it, you’d rather pay Uncle Sam and get enough leftovers for a tank of gas. My advice is of course, do not leave that free money on the table, and find a way to live a little bit more frugally to afford it – just a little bit.
A 401k check up involves reviewing the things that you can control. You control:
- The amount you contribute
- The investments you chose to allocate your contributions
Sometimes the investments available to you are limited, and that’s something that you can’t control (unless you can allocate to a Self-Directed 401k, which is not available to every plan – check with your company’s benefit department to see if it’s part of your plan), but knowing your goals and tolerance for volatility and risk is in your control, and you should be selecting your investments based on that view. A lot of companies provide tools to help you determine the best investment allocation for your situation. There are also online tools available to help you objectively determine your risk tolerance. Click here for a quiz on Rutgers University’s website.
Still not sure how to best build your retirement strategy with your 401k? Give us a call. We’re happy to have a complimentary discussion about your 401k savings situation.