Saving for retirement is tough, but it’s worth it. With few workers having access to pensions and social security designed only to replace around 40% of your earnings, chances are you’ll have to rely on your savings for the bulk of your income in retirement.
While the best way to save for retirement is to start early and invest regularly, there’s a trick that can instantly double your savings effortlessly: earn matching 401(k) contributions.
What are matching contributions?
If you have access to a 401(k) through your employer, you may be eligible for matching contributions. For every dollar you contribute to your account (up to a certain percentage of your salary), your employer will double it.
Not every 401(k) offers this benefit, but if yours does, taking full advantage of it could dramatically increase your savings without any effort on your part.
Among 401(k) plans that offer matching contributions, the average match is 3.5% of a worker’s salary, according to data from the US Bureau of Labor Statistics. Additionally, the median income of American adults is around $52,000 per year.
If you earn $52,000 a year and receive a 3.5% match, that means your employer will contribute up to $1,820 a year to your 401(k). Although it may not seem like much, it could be more than you think.
How much can you earn from an employer match?
Matching contributions are essentially free money and they can instantly double your retirement savings. Over time, they can add up to tens or even hundreds of thousands of dollars.
Let’s say, for example, that you receive $1,820 a year in matching contributions. Let’s also say that you earn a modest 8% average annual return on your investments (which is just below the long-term market average). Here is the approximate amount of these contributions over time:
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Also keep in mind that this is only correspondence with the employer. Once you’ve factored in your own contributions as well, you’ll have at least twice the savings.
Also, since your salary will likely increase as you get older, this means your employer could increase as well. Your consideration is normally a percentage of your salary, so the higher your earnings, the more you will receive from your employer.
Maximize your retirement savings
Often the hardest part of saving for retirement is just getting started.
If you’re having trouble finding money to save, start small. No amount is too small, so if you can only afford to contribute a few dollars a week to your 401(k), start there. With the employer match, you will actually invest double that amount, which is much better than saving nothing.
Gradually, you can then begin to increase your savings rate over time. Aim to end up contributing enough to earn the full employer match so that you receive all the free money you are entitled to. If you can save even more than that, that’s icing on the cake.
Preparing for retirement isn’t easy, but increasing your savings even slightly can make your old age years much more comfortable. By taking full advantage of matching contributions, you can grow your nest egg more than you think.
The $18,984 Social Security premium that most retirees completely overlook
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