Don’t Leave Free Money On The Table!

I’m going to assume that no one reading this wants to leave free money on the table. Also, I’m going to assume that we would all think that is silly.

However, with those assumptions being said, over 40% of plan participants do not take advantage of this wonderful opportunity! Let’s talk about contributing at least the minimum to maximize your match.

The Ins and Outs of Matching (a.k.a. Free Money)

If you are unsure whether your company offers matching or are unsure how much your company matches, speak with someone in the human resources department to find out. You may be eligible to contribute right away to your company’s retirement plan. You may have to wait a certain period of time before you can even start contributing.

Some companies offer matching dollar for dollar up to a certain percentage. For example, a company can offer a 5% match when you contribute 5%. Other companies may offer a match such as 50 cents for every dollar. This means that if you contribute 6%, they will match 3%.

Let’s talk vesting. This is a fancy way of saying when the money will be yours to keep. Some employers require you to work there for a certain length of time before their money will become your money. For example, if your company has a five year vesting schedule, the matching funds that they have contributed will be yours after you have worked there for five years. If you only stay for four years, they will not give you the money they have contributed to your account.

One more thing about vesting that is important to know. Some companies have a graduated vesting schedule. This means you can keep their money little by little. One example of this is a 20% vesting schedule per year for five years. You get to keep 20% of their matching contributions after one year, but they will take back the other 80% if you leave that company. After two years, you keep 40%. Three years? You keep 60%. After four years – 80%. And after you work there for a full five years, you are fully vested and keep 100% of their matching contributions as your own when you leave that company.

Whichever type of vesting schedule your employer offers, it is incentive to stay with that company.

One important thing to note is that your employer’s matching contributions play no part in your annual contribution limit ($19,500 for 2020). This is great news!

Setting Up Your Retirement Plan Contributions

The easiest way to set this up (and in many cases, it’s the only way) is to set up your contributions through payroll deduction. Then it will be automatically taken out of your paycheck and deposited into your retirement account. You won’t even see the money. Out of sight, out of mind! Find out from your Human Resources department how to set this up. Sometimes it is done on the computer. Sometimes it is a form to fill out. However you set this up, automate it so it is done every pay period.

It is important to note that some companies have a default contribution percentage. Be aware that this amount may not be enough to meet the minimum to maximize your match. For example, if the default contribution percentage is 3%, but your company will match you on the first 5%, then you are definitely leaving free money on the table, my friend!

Revisiting Your Contributions

Every year or so, take a look at your contributions. Can you up the percentage 1%? Did you get a raise? You may want to up your contributions even just 1%. Can you do 2%? Did your lifestyle change? Maybe children have moved out of the house. Again, can you up your contributions when your expenses decrease? Even raising your contribution percentage 1% can be beneficial over the long run. Usually people find that raising the percentage 1% does not affect their lifestyle at all. Doing this several times over the course of your career can pay off big in the long run.

IMPORTANT Final Thought! (Don’t Mess Up Your Free Money!)

If you want to max out your contribution limit (i.e. contribute $19,500 in 2020), AND you receive matching on your contributions, be sure that you spread out your contributions to take advantage of the matching each and every pay period. That last sentence was a mouthful. Please read it again. This is so important! If you max out your contribution limit during pay period 19, and there are 26 pay periods in the year, you have just missed out on matching for seven pay periods! Again, that is leaving free money on the table!

I don’t want anyone to leave free money on the table!