So, you have a 401K. Congratulations! Many don’t. What’s next? You have to decide how much you would like to contribute, of course. And this crucial stage is where I fear that many people get tripped up. Many employers with a 401K plan offer a match. And it seems natural that many employees will look at that matching percentage as a suggestion. Or worse, a maximum.
According to the Bureau of Labor Statistics, the average 401K match nets out to 3.57%. In their most recent National Compensation Survey, they found that of the 61% of employers that do offer a 401K plan:
- 49% match 0%
- 41% match a percentage of employee contributions between 0-6% of salary.
- 10% match a percentage of employee contributions at 6% or more of salary.
- The median match is a 3%.
In other words, much more than half of the working population gets zero 401K match. And for the minority that do, the median 401K match is a paltry 3%… who says Social Security isn’t a necessity?
A 3% match on a salary of $1M might be pretty sweet. Unfortunately, the median household income in the United States was $74,580 at a recent check. So, the median household 401K match (for those “lucky” enough to get one at all) is about $2,237.
Now, let’s assume you’re lucky enough to have a 401K. AND you’re even luckier and get a 401K match of $2,237 on your own $2,237 contribution. AND you’re lucky enough to get that every year for the next 30 years. AND you invest it wisely enough to average a 7% return. AND inflation is only at 2% per year (equally a net 5% return after subtraction). AND you don’t raid the balance at any point along the way. AND hidden 401K fees don’t raid the balance either. How much would you have?
About $452,301.
That’s a lot that has to go right to get to that amount. Maybe $452,301 doesn’t sound so bad (and it’s certainly far better than the horrific median retirement account savings of $12,000 for those nearing retirement age), but do you think it’s enough to base a retirement on? Particularly one without pensions and with the threat of Social Security benefit decreases?
I don’t.
Here’s the thing: your employer’s 401K match is not a suggestion. 401K matches are set based off of the labor market more than anything else. Employers want to attract and retain talent, and in order to do so, they need to have a total compensation package that is competitive with similar competing employers. And that total compensation package may include a 401K (or it may not, since the labor market is weak on this benefit). The bar is set pretty low. How much you NEED to retire is something that you will need to calculate on your own, and is entirely separate from employer 401K matching levels.
You should also not view your employer’s 401K match as a maximum contribution that you should not go beyond. For anyone who can afford it, I highly recommend blowing past your employer’s 401K match and trying to reach the federally allowed maximum 401K contribution – an amount that is far beyond what 99.99%+ of employer 401K matching will ever reach (although the maximum employer 401K contribution is significantly higher than the employee contribution). And if you can’t afford it now, it’s something to strive for. Just ignore the 401K match and save as much as you possibly can.
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Hmm, that’s pretty interesting. I had no idea the average 401k match was that low. What percentage of savings would you say should go to your 401k vs other investment and savings accounts?
The easy answer to that is “as much as you possibly can”, since 401K’s are pre-tax and you want to get the maximum possible match.
The more complicated answer is it depends on if you can make HSA contributions in a given year. If you can, HSA contributions should take priority over 401K after 401K employer match $’s are fully achieved.
I’d argue that IRA (whether Roth or standard) contributions should take priority over 401K contributions once the company match is met. A lot of people have poor 401K fund choices with little they can do about it, whereas we have complete control over how we invest into IRAs.
I agree. However, most people don’t contribute to an IRA, let alone a 401K that is already set up for them. But, yeah, if you actively contribute to both an IRA can result in lower fees and more choices, once your full match has been met.
Depends on the avg return rate over 10 yrs or whatever your aim may be. I looked it up in my case. Avg return was lower so, I just matched and pushed discretionary into outside investments. Above comment regarding not affording the max – spot on. You will get there with common sense budgeting. Hopefully, you will begin maxing it out once the kids are out of college, house is paid off, etc. Retirement planning is compounding interest and not a $100 bet on a 10:1. But, most would burn their mouth rather than let the food cool.
Max out the 401K and Max out the IRA to the Government Max Allowed… there really isn’t another option…
“I highly recommend blowing past your employer’s 401K match and trying to reach the federally allowed maximum 401K contribution ”
But why though? Can you show me the math?
The Federal Maximum should really be your minimum!
I agree. But, I think something that trips up so many people in the first place is that they start tying up their income to monthly payments from debt. I think they need to really get clear of any debt (other than their home) first and then start socking away into retirement once they have a nice emergency fund in place. Although this will take some time, I think they will be less likely to actually pull the money out since they have the emergency fund as a nice little cushion.
Also, what about just doing the Traditional 401k up to the match and then doing a Roth IRA? Wouldn’t that be a better option so that we can go after the tax free money as well? If you can do the Roth 401k you should definitely be doing that instead though.
If employer offer for 401 k plan & also put some money for employee for 401 k & also Mark column as Retirement on W-2’s of Employee but employee have not put any money in 401 k still employee can contribute for Traditional IRA $ 5500 for the year 2016?