Really, it’s not as complicated as it seems. According to the Millennials + Money data sponsored by the Social Media giant, Facebook, only 33 percent of Millennials (ages 21–34) are satisfied with the way they are currently investing for retirement, and the majority aren’t saving at all. A 401(k) plan with an employer match can help jumpstart your savings. Here are 6 quick tips to help you manage the rules that come with your company match.
TIP #1: TAKE ADVANTAGE OF MATCH MATHThe employer match on your 401(k) plan is free money. But it’s also more than that. Long-term investment returns in the stock market usually average 7 to 8 percent, but with an employer match, it’s like boosting your returns to 10 percent because of the match math. Every company’s matching program is different and some don’t match at all, but getting one is the place to start if you aren’t saving already. Most companies offer a dollar-for-dollar match up to a certain percentage of your pay – usually 3 to 6 percent. The most common 401(k) match is 50 cents for each dollar contributed up to 6 percent of pay. That extra 50 percent is what can boost your returns because 20 percent of 50 percent is 10 percent.
TIP #2: UNDERSTAND HOW THE MONEY GROWSEinstein called compound interest the Eighth Wonder of the World because of its ability to snowball over time. If you have time to grow your money (and even a 50-year old has more time than you think), then you can benefit from the exponential returns offered by compound interest. In addition to the free money, the tax advantages of a 401(k) mean your money gets to benefit from triple compounding. That means there are three ways your money grows better:
- Every dollar you save reduces your current income tax bill by an equal amount. That’s why there’s a limit on the amount of money you can contribute. For 2017, the contribution limit is $18,000 a year unless you’re over 50, in which case the minimum is $24,000.
- Your take-home pay actually goes down by LESS than a dollar in proportion to what you’re able to save.
- Your money grows without being taxed on the returns it earns. And boy does it grow! If at the age of 25 you put in the $18,000 minimum and added nothing more and took nothing out, in 50 years’ time earning 10 percent, you’d have over $2 million. Don’t believe us? Check for yourself using the U.S. Securities & Exchange Commission’s Compound Interest Calculator.
TIP #3: GET VESTEDBeing vested in a 401(k) is NOT the same thing as being invested. All the money you contribute to your 401(k) plan is always automatically yours, meaning should you decide to switch jobs, you get to take that money with you. It’s the free money provided by your employer match that has to do with vesting. If you want ALL the free money, then you have to stick around until you’re vested. Once you spend enough time on the job, then all the free money plus your money goes with you when and if you leave.
TIP #4: LOCATE YOUR VESTING SCHEDULEFederal regulations set the guidelines for company vesting, but your employer gets to pick the schedule: either immediate, gradual over a period of time or all at once when you have worked for them for a certain number of years. To find out what your company’s vesting schedule is, you can do one of two things:
- Ask your Human Resources (HR) representative for a copy of your 401(k) plan’s summary plan description and locate the section on “vesting.” The rules will be explained there and if you’re still confused, you can ask your HR representative to translate.
- Check your recent 401(k) statement. It will show you how much of your 401(k) balance is currently earned from employer contributions.