Saving for retirement may not sound thrilling, but who doesn’t like free money? That’s essentially what a 401(k) match offers. If your employer provides one, they’re essentially giving you extra money for your retirement savings just for contributing to your 401(k).
But how does a 401(k) match work? How much should you contribute, and what if your employer doesn’t offer one? No worries—we’ve got it all laid out for you in this guide.
What’s a 401(k) Match?
A 401(k) match is an employer’s way of incentivizing you to save for your retirement. When you contribute to your 401(k) plan, your employer matches part—or sometimes all—of your contributions, up to a certain limit.
Think of it as a bonus for saving for your future. For example, if your employer offers a 100% match up to 5% of your salary and you earn $50,000 a year, they’ll contribute an additional $2,500 to your 401(k) if you contribute at least $2,500 yourself.
Types of Matches
- Dollar-for-Dollar Match
If your employer matches 100% of your contributions (dollar-for-dollar) up to a set percentage of your salary, they’ll contribute exactly what you do, up to the limit.
- Partial Match
With a partial match, your employer matches a percentage of the amount you contribute. A common example is a 50% match on up to 6% of your salary, meaning they’ll contribute half of what you put in, up to a cap.
Why Does it Matter?
A 401(k) match is free money that can significantly boost your retirement savings without any extra effort. It’s essentially part of your compensation package, so not taking advantage of it means leaving money on the table.
What is Vesting?
Before you get too excited about that extra cash, there’s a catch—vesting.
Vesting refers to the schedule that determines when the money your employer contributes actually becomes yours.
While you own everything you contribute to your 401(k) immediately, your employer’s match may take longer to fully belong to you.
Types of Vesting
- Immediate Vesting
All employer contributions are yours as soon as they’re made.
- Graded Vesting
You earn ownership of your employer’s contributions gradually, typically over a number of years. For example, you might become 20% vested after one year, 40% after two years, and so on until you reach 100%.
- Cliff Vesting
You don’t own any of your employer’s contributions for a certain period (e.g., three years), but once you hit that mark, you’re fully vested.
Understanding your vesting schedule is essential if you’re considering leaving your job, as you could lose some or all of your employer’s contributions if you’re not fully vested.
What’s a Good 401(k) Match?
While any match is better than none, some matches are more generous than others. The average employer match is around 4.7% of a worker’s salary, according to Vanguard’s annual report on 401(k) plans. However, good matches tend to fall between 4% and 6%.
How Do You Compare Offers?
When evaluating job offers, don’t forget to factor in the 401(k) match. A higher match can significantly boost your total compensation, especially over the long term.
For example, if one company matches 6% while another offers 3%, that could be the difference of thousands of dollars per year in retirement savings.
What if Your Employer Doesn’t Offer a 401(k)?
If your employer doesn’t offer a 401(k), all hope is not lost. There are other ways to save for retirement effectively:
Alternatives to a 401(k)
- IRA (Individual Retirement Account)
Open a Traditional or Roth IRA. While the contribution limits are lower than a 401(k) ($6,500 for 2023), these accounts still offer tax advantages.
- Solo 401(k)
If you’re self-employed, a Solo 401(k) allows you to contribute both as an employee and employer, letting you save more.
- HSAs (Health Savings Accounts)
If you have a high-deductible health plan, an HSA can serve as a supplemental retirement account with triple tax advantages.
- Taxable Investment Accounts
While they don’t offer the same tax benefits as a 401(k), taxable brokerage accounts can help you grow your wealth for retirement through investments.
How Much Should You Contribute to Your 401(k)?
If your employer offers a match, your first priority should be contributing enough to get the full match. Anything less means leaving free money on the table.
After that, consider increasing your contributions gradually. A common recommendation is to aim for saving 15% of your income, including the employer match.
Why Save More?
The earlier and more you save, the more time compound interest has to work its magic. A small increase in your contributions today can lead to significantly greater savings by the time you retire.
For example, if you’re 30 years old and contribute $5,000 annually at a 7% return, your balance at age 65 will be around $795,000. Increase your contributions to $6,000, and your savings grow to $954,000.
Automate Your Contributions
Many 401(k) plans allow you to set an automatic annual increase in your contributions. This is an easy way to boost your savings without feeling the pinch all at once.
Unlocking the Potential of Free Money!
Taking full advantage of a 401(k) match is one of the smartest financial moves you can make. It’s an easy way to grow your retirement savings, reduce your taxable income, and reap the benefits of compound interest.
Whether you’re just starting your career or have been in the workforce for years, now is the time to evaluate your employer’s retirement plan and maximize the free money available to you. Your future self will thank you!