Retirement accounts and employer matches. My nerdy self really loves those two things. If a retirement account were a cake, then the employer match would be the icing that goes on it. Let me explain how awesome an employer match can be to your retirement savings and why you should definitely take advantage of it.
(1) What is an Employer Match?
Simply put, an employer match is just a matching contribution that your employer makes to your retirement account when you make a contribution to it yourself. Don’t overcomplicate it. 🙂
Also, it is a really good benefit that you hopefully have from your employer. In fact, over half of all employers offer a retirement account match.
Here’s how it works:
Your employer can offer several different types of matches. They can offer a 100% match, a 50% match, a 25% match, etc. Your employer will also likely have a cap on your match that will depend on the employer. The cap can be 2%, 3%, 6%, 10%, etc.
Here’s how it works: If your employer offers a 100% match up to 5%, that means that for every dollar of your pay that you put into your retirement account, your employer will match that up to 5%. That might sound confusing so let’s use Nicky and Jerry as examples.
Example: Nicky
Nicky makes $50,000 per year and his employer matches 100% of his pay up to 5% into his retirement account. Nicky decides to put in 5% of his pay so that he will get the full match.
This means that Nicky will put $2,500 per year into his retirement account and his employer will ALSO put $2,500 into his retirement account, giving him $5,000 total in his retirement account. That’s a great deal!
What if Nicky decides to put 10% of his pay into his retirement account ($5,000)? His employer will still put in $2,500 because his employer has a cap of 5%.
What if Nicky decides to put only 3% of his pay into his retirement account ($1,500)? His employer will also put $1,500.
Example: Jerry
Jerry works for a company that offers a 50% match up to 6%. Jerry also earns $50,000/year
If Jerry decides to put in 6% of his pay to take full advantage of the employer match he will put $3,000 in his retirement account and his employer will put $1,500 in his retirement account.
If Jerry decides to put 10% into his retirement account ($5,000), his employer will still be maxed out at $1,500.
If Jerry decides to put 3% into his retirement account ($1,500), his employer will put $750 into his retirement account.
Common Matches
Employer matches have become much more common over the past decade or so. The average employer match is about 3.5%. Here’s how different companies match their retirement accounts:
- 49% of companies do not have a match at all
- 41% of companies have a match that falls between 0% and 6%
- 10% of companies have a match of more than 6%
What is a Vesting Schedule?
One important thing to remember when investing in a retirement account with an employer match is that the money may not be yours right away. There is a thing to consider called a vesting schedule.
A vesting schedule is basically a timeline of when the money that the EMPLOYER has contributed will be yours. Remember though: Any money that you contributed to the retirement plan is yours always and forever.
There are various different vesting schedules that will depend on the employer. Sometimes the vesting schedule is simply immediate. Meaning that the money that the company has contributed to your retirement account is yours right away.
If there is a vesting schedule of three years you might be able to keep ⅓ of the employer contribution after each year of service, or you have to wait a full three years to keep the money that the employer contributed to your retirement plan. It will depend on your specific plan though.
I have seen vesting schedules last as long as seven years (although this is uncommon).
(2) At What Point Should You Take an Employer Match?
An employer match should be taken very early on in your financial journey. It is simply too good of a benefit to forego for very long. The compound effects of getting an employer match are really outstanding. I suggest that you get your employer match as soon as you have at least $1,000 in your emergency fund. Once you have a small emergency fund, you NEED to start getting that match. And once you start getting that match, keep getting it for as long as you are working.
(3) Why Should You Take an Employer Match?
Getting the employer match in your retirement account is one of the biggest no-brainers in personal finance. You should do it, and do it soon!
The biggest reason is that it is free money. It’s a way for your employer to help offset your retirement income. Your employer will LITERALLY be putting money into your retirement account for you!
The next reason is that the rate of return on your money will dramatically increase! The money that you are saving for retirement will be invested. With any investment account, most people would be excited to get a 10% or 15% rate of return. But what if I told you that you could get a 60% or 65% rate of return? That will happen if your company offers a 50% match and the accounts performed well! And in the same scenario if they offer a 100% match your rate of return would be 110% or 115%!
Even if the market went down for a little while and you lost money in your investments you would still get an 80% or 90% rate of return. You can’t beat it!
Final Thoughts
I cannot stress enough the importance of saving for retirement and getting your employer match. It needs to be said, however, that simply getting your employer match is not enough. You need to be saving ABOVE AND BEYOND your employer match to retire successfully.
But the start of saving for retirement begins with getting our employer match.
I know that it can seem daunting to start saving for retirement. I get it. It was for me as well when I started.
Just give it time. The money will grow quickly once you start investing regularly.
You can do it!
If there is anything that I can do for you, please don’t hesitate to let me know in the comments below!
Until next time!
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