Balancing a retirement and school financial savings may be overwhelming. Listed here are 6 ideas that may assist ease the lengthy-time period planning.
Should you aren’t doing this one factor, you may value your self tons of of hundreds of dollars.
Too many People underestimate the worth of their employer-sponsored retirement financial savings accounts, notably if the employer is prepared to match some, or all, worker contributions. Whereas nearly all of staff with 401(okay) plans contribute greater than sufficient to take full benefit of their employer’s matching program, there are nonetheless about 20% of people that do not.
That is maybe one of many worst retirement errors you can also make. Positive, it does not look like a ton of cash to be lacking out on now, however you could be stunned at how a lot of a distinction it could possibly make if you ultimately retire.
One of many worst retirement errors you can also make
About seventy five% of corporations providing 401(okay) retirement plans supply some sort of a matching program, generally based on an employee’s contributions capped at a percentage of their salary. For example, a 401(k) matching policy may be “50% of employee contributions, up to 6% of total compensation.” In other words, if you earn $50,000 per year and contribute $3,000 to your 401(k) — 6% of your salary — your employer will contribute an additional $1,500 on your behalf.
However, about one in five participants don’t contribute enough to take full advantage of their employer match, according to several different surveys. Besides cashing out your 401(k) and spending the money, this is perhaps the worst retirement savings mistake you can make.
Why the employer match is so important
Here’s a simplified example that shows why this is so important. Let’s say that you earn $100,000 per year and that your employer will match 50% of your contributions, up to 5% of your salary. So, you choose to contribute $5,000 into your 401(k) each year and your employer matches 50% of your contributions for a total of $7,500 flowing into your account annually. Over a 30-year period, your account could be expected to grow to approximately $708,000, assuming 7% annualized investment returns.
On the other hand, let’s say that you choose to contribute just 3% of your salary, which is a common automatic contribution level set by many employers. Including the employer match, this means that just $4,500 will go into your account per year. Each year, you’re missing out on $1,000 in employer contributions that you could have received for contributing the 5% matching limit. What’s more, a move like this can really add up over time — assuming the same 7% annualized returns, your account would only grow to about $425,000. That $283,000 difference could have a big impact on your financial…