One of the biggest mistakes that I oftentimes will see people make is that they will not take full advantage of their 401k match. Honestly, I think that this mistake can have many, many years of potential repercussions, but it makes me wonder – what actually is the average 401k match?
Before we get too far down the rabbit hole, let me first explain what a 401k is. A 401k is a tax-advantaged plan that is commonly offered by employers for their employees to use as a retirement savings account. Essentially, the employees are given the option to either use a Traditional 401k meaning they put in pretax dollars, a Roth 401k meaning its after-tax dollars, or a blend of the two.
There is always a lot of debate about which is best between the Traditional and the Roth, but personally, there is no correct blanket answer because it 100% depends on the individual and the situation that they are in. I personally use a blend of both the Roth and Traditional but the Roth actually has a little hidden secret for you to cram a little extra money into it if you are savvy enough!
The #1 benefit of a 401k is that typically, the employer is going to offer you some sort of matching contribution based on the amount that you put into the 401k. So, for example, they might offer you a 1:1 match up to 5% of your salary.
This means that if you make $52K/year and you get paid weekly, then every week you will basically gross $1K before taxes, insurance, etc. So, let’s pretend that you’re a great money mind and are fluent in the language of money and put 5% in your 401k.
This means that every single week, you’re going to automatically have 5% of your salary taken out and put in this account. For simplicity purposes, let’s assume you’re using the Traditional 401k, so it will be 5% of $1K since it’s a pretax contribution, thus meaning that you will be putting in $50 and your employer will also put in $50 because they’re matching you.
Not a bad deal, right?!
Basically, you invested $50 (a tax-advantaged $50 at that!) and you got another $50 in your account for free. BOOM!
But what if you thought you could only invest 3%? That means you put in $30 and your employer also puts in $30. So, you’re going to get another $20 in your check, or really about $15 after taxes, and you’re foregoing $40 later in your life, $20 from your savings and $20 from your employer.
Sounds like a bad deal, right? Why would you want to turn down that free money?
We will get into that a little bit later 😊
When I was doing research finding the typical matching 401k contributions for employers, I came across this amazing study that was compiled by Vanguard based on their own data, and it truthfully was a little bit depressing.
I think that I have always somewhat had blinders on when it comes to employers matching their employee’s contributions and truthfully, thought it was much more common and much higher than what is actually true.
Below shows the most common types of matching with by far, the most common being 50% for every percent up to 6%, meaning your employer would match 3% if you put in 6%:
Now, honestly, I actually think the 50% employer match is a good thing because it can almost “trick” people into saving even more. For instance, if a company wanted to contribute 5%, they could offer a 50% contribution up to 10%, meaning they’d still only put in 5% but the employee would be putting in 10%.
There are obvious cons to this as well but let’s be honest – people not investing enough for their retirement is a pandemic in its own.
Overall, the average 401k match in 2018 in America was 4.3%:
Now, that’s not completely awful, but certainly a lot lower than what I might think. There are certainly other things in play too; that a company might be giving benefits for but skimping out on the 401k is not a likely cutting place I would imagine.
For instance, my wife just had a friend accept a job with Lululemon and they will give you a debit card each month with some money on it that you can use for health-related expenses. Pretty cool, right?
When my wife told me this, my response to her was, “it’s all just money.”
What I mean is that you can pick your benefit – lower insurance premiums, 401k match, extra vacation days, parking/travel stipends, etc. – it’s all just some sort of cash value.
Companies are getting more and more creative with how they give back to their employees, but do you know what one thing remains constant? The 401k match! And in fact, it’s actually slowly been increasing over the years:
Now, do you know what the most frustrating part about all of this information is to me? It’s the simple fact that so many people are leaving money on the table!
Many people just simply do not max out their 401k for one reason or another. Maybe they just really need that cash now or maybe they don’t understand the repercussions of their decisions, but either way, it’s a massive mistake.
And you can take it from someone that made that mistake – ME! I did this. After about a year with my company, I chose to not only stop maxing out my employer match but I also made the decision to cash out my 401k – what a freaking mistake.
Not only did I have to pay major taxes AND fees, but that money that I had saved for retirement was now done earning compound interest and I had also stopped adding anything new. What a massive, massive, massive mistake.
I never said I was perfect – I just strive to be. And I continuously am open to all opinions and learning, and that’s what has made me much more educated on the subject because I have made these big mistakes.
You see, my thought was that if I just stopped maxing out my match, I could use some of that money to pay off my credit card debt that I was in, another awful mistake of mine.
While that does make sense to some people, my credit card debt was 22% interest. That is a pretty major interest charge, but my 401k employer match was 1:1, so I was earning 100% right away on my money!
Literally I put in $1 and I get a free $1 – 100% returns.
But the thing is, the returns are actually much, much more than just 100%. In fact, they’re closer to 1600% believe it or not. I know it might be hard to comprehend this, but I go into a lot more detail and the math behind it here.
But the question is this – just how much are people actually leaving on the table? Well, in 2018 it was estimated that employees needed to contribute 7.4% of their salary in total to max out the 401k match, but they actually only contributed 6%:
“Andy, that’s close! Only 1.4% off.”
Sure, 1.4% off…but that’s only 81% of the available match – are you happy leaving 19% on the table? I certainly am not.
Because I am a super nerd, I built a 401k Employer Match Calculator where you can input your different variables and then play around with your anticipated balance.
You can download the calculator below, but I recommend you check out my blog post on it to make sure that you’re fully comprehending the way that the tool works so that you’re not misusing it and getting inaccurate information:
Let’s assume the two different scenarios:
- Scenario 1
- You currently make $50K/year
- You contribute 7.4% (the amount needed to max out your 401k match)
- You earn a 4.3% employer match (the average in the US in 2018)
- Every year you earn a 3% raise
- Your growth rate is 8%, meaning that’s the amount that your balance will grow by. It’s important to note here that the S&P 500 average has been over 10% for the last century
- Scenario 2
- You currently make $50K/year
- You contribute 6% (the amount that most Americans contribute on average)
- You earn a 3.49% employer match (this is prorated at 19% of 4.3% by taking 6%/7.4%*4.3%)
- Every year you earn a 3% raise
- Your growth rate is 8%
How do you think the results stack up? I bet you’ll underestimate the difference!
As you can see, it’s a pretty major disparity between the two different options and this is only with a 1.4% difference in the amount that you’re actually going to contribute to your 401k!
This is why I urge you to always, always, always max out your 401k – and that includes before you pay anything extra on your credit card debt.
And yes – please note that I am not telling you to stop paying it. You still have to make those minimum payments!
“Andy, I get it – I know I need to max out my 401k and I am already doing that, but I only get a 3% match – now what?”
I’m not going to tell you that you need to quit your job just because you’re not getting a high employer match on your 401k, but if you’re unhappy, treated unfairly, want to move, or anything else, maybe this is just another reason that will get you on your way.
Remember how I said that things are just money? Well, that’s exactly true in this situation as well. Don’t take a 10% pay cut just to get a 5% higher 401k match. That wouldn’t make any sense, would it? But, if you were theoretically offered two identical positions and one had a 401k match of 50% up to 6% of your contributions and the other was 100% up to 6%, you’d obviously want the job with the higher employer match, right?
Making the decision to go with the employer with the higher 401k match would be a $600k decision if you worked 40 years!
No pressure 😊
But really, it shouldn’t be that much pressure. For the most part, the only thing that you really can control is your own contribution. Just do everything possible to make sure that you are maxing that out and then after that, you can use your money to fund the other items that are in your own financial order of operations.
For me personally, I max out the 401k employer match and then move onto the HSA, but that’s just me and my plan!
Chances are, if your employer match is below the average of 4.3%, that might mean that you’re getting some other benefit in some other way like I mentioned with stock options, vouchers or even just some flexibility in your lifestyle.
I had a friend that worked for Macy’s corporate and every Friday between Memorial Day and Labor Day, all employees were given “summer hours” and they could leave at 1-2PM that day and not take vacation. Do you know how amazing that is?
Now, on average that’s like another week of vacation but the fact that you get it on Fridays when the weather is great is just amazing.
Would I trade a couple of percent in my 401k for that benefit? Hard to say. Personally, probably not, but now that I have a son and am busy 24/7, the thought of using that time to go home and get yard work done, leave early for a long weekend, hit up a brewery with the wife and some friends, or even just spend a few extra hours with my son, sounds absolutely amazing!
But at the end of the day, it just comes down to what you value and then making the best decision that you can at that point in time.
As with anything, knowledge is power, and if you’re now realizing that you’re getting a quick one pulled on you and aren’t getting a fair employer match, maybe it’s enough to jump ship. And if you’re one of those few getting a 10% employer match, maybe you need to work a little harder to hold onto that awesome job!
But at the end of the day, you can only control what you can control. Max out your employer match and then look to open an IRA where you can pick your own investments.
Roth or Traditional, that’s up to you – just do it!