Who would turn down free money? About 1 in 3 workers, as it turns out.
About 33% of workers do not contribute enough money to their 401(k) plan each year to get their full company match, says Vanguard, one of the world’s biggest mutual fund providers.
In its “How America Saves 2019” report, Vanguard says that during 2018, almost two-thirds of workers received the full employer matching contribution for which they were eligible.
However, that still leaves one-third of workers who are not getting the full match — who are, in essence, turning down free money.
Each company has its own formula for how it matches contributions. But typically, a company agrees to match a certain percentage of your salary if you contribute that same amount to the plan.
Vanguard says company matches typically range between 1% and 6%. The average for all companies is 4.3%.
So, if your firm matches 4.3% and your salary is $100,000, the firm would agree to put $4,300 in your 401(k) each year — but only if you contribute up to that amount.
If you make an annual contribution of less than $4,300, the employer match would be reduced to the level of your actual contribution.
It’s difficult to overstate the damage that missing matching contributions can do to your retirement prospects.
A 30-year-old worker who loses out on just one year of $4,300 in matching contributions would lose out on more than $60,000 in retirement savings by age 70, assuming a 7% annual return.
Thus, missing a few years of matching contributions can be a life-changing mistake.
For its report, Vanguard looked at 1,900 plans for which companies provide recordkeeping services. Those plans serve 5 million workers.
How to avoid retirement investing mistakes
Unfortunately, failing to earn matching contributions is not the only mistake retirement savers make.
For example, many savers invest in mutual funds with high expenses. This is better than not investing at all, of course, but it can still devastate to your ability to build a nest egg. As we have reported in the past:
“Too many workers ignore the high cost of investment fees. As we point out in ‘Investing Fees: A $400,000 Dilemma That Can Rob Your Nest Egg Blind,’ one study found that fees can rob you of hundreds of thousands of dollars in retirement savings.”
For more, check out “5 Common and Costly Retirement Investing Mistakes.”
It’s easy to make seemingly small mistakes that nevertheless will have incredibly large — and dreadful — consequences for your financial future. If you need help avoiding such a sad fate, consider enrolling in our retirement “boot camp” course, The Only Retirement Guide You’ll Ever Need.
Created by Money Talks News founder Stacy Johnson and designed for folks between the ages of 45 and 65, it is a 14-lesson course in everything you need to know about preparing for retirement.
As Stacy says:
“The goal of the course is simple: to give you the confidence to know you’re on track to create the retirement you deserve.”
The first chapter is free. So, check it out.
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