The Biggest Mistake You Are Making with your 401(k)k could cost you over a million dollars. For some of you, it could lower your 401(k) balances by several million dollars. We are facing a retirement planning crisis in America. Boomers, GEN X, and even Millennials are not saving enough to comfortably retire and the average person is leaving more than $30,000 of retirement income on the table. Here is how they are messing it up and making the #1 401(k) mistake. Keep reading to avoid this Million Dollar 401k Mistake.
By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™
Do you know the #1 Mistake People Make with their 401k?
Would you be more likely to contribute enough to your 401(k) in order to get your full employer match if you knew how much that match would grow by the time you’re ready to retire? Perhaps you might be more motivated if you realized the tens of thousands of dollars you’d be losing during your retirement years by not getting the full employer match. Not maximizing your employer match could cost millions of dollars over the course of your working lifetime and typical retirement.
Nearly one in five workers are making this mistake. How much you should contribute to and the best retirement investment allocations are debatable. However, there is no arguing that you are leaving free money on the table if you fail to get the full employer match. Over time, this can drastically reduce your income in retirement. This is why missing the full employer match is the number one biggest mistake people make in their 401(k) retirement plans.
How Much is the Employer Match Really Worth?
On average, employees leave $1,336 in matching funds on the table each year by not saving enough in their retirement accounts. This is according to a 2015 study by Financial Engines. Hopefully, your salary is bigger now than in 2015, which means this single retirement planning mistake is also larger now.
You may think this is no big deal. What does $1,336 mean for your retirement security, which may be decades away? How much could that really add up to? A mistake would be to believe that the number would add up to $60,000 ($1,336 multiplied by 45 years of work).
Cost of Skipping Full 401(k) Match over Your Career – The Million Dollar 401k Mistake
Leaving $1,336 of a company match on the table over your working career from 22 to 67 would total more than $60,000 in lost money from your employer. You would also end up paying more state and federal income taxes over your working years. But these numbers pale in comparison to what you are giving up in retirement security. Invested wisely, that money would grow exponentially over time.
For example, putting that $1,336 into your 401(k) each year, from 22 to 67, and assuming an average return of 10% per year, how much do you think you would have at retirement? The $1,336 per year, with an average return of 10%, would grow to more than $960,000 by the time you were 67. That number alone is well beyond what the average person has saved for retirement.
How much does $960,000 translate into retirement income?
Using the 4% rule for the sake of simplicity, how much income would $960,000 mean for your retirement? The 4% rule basically means withdrawing 4% from your retirement account each year. In this case, you could take out $38,400 per year in retirement. Not a small amount of money, but hardly enough for you to live your dream retirement.
Yes, you read that right, just giving up the average employer match over your working life could cost you $38,000 per year in retirement income. Additionally, there are other retirement income strategies that could make skipping the employer match look even worse. The bigger the retirement income, the bigger the mistake of skipping the employer match. Either way, I think we can agree having more money in retirement is better than having less.
Employer Match and your Retirement Contributions- Go for a Multi-Million Dollar 401k
Capturing all of your employer matches throughout your career can help you get closer to financial freedom in retirement. If the average person is losing out on $1,336 of employer match each year, that individual is also likely not contributing much. Broken down over the course of a year, $1,336 is only $111.33 per month.
Now, let’s assume you start working at the age of 22 and remain with the same employer until you retire at the age of 67. That, coupled with the fact that your employer offers a 100% match and you save $111.33 each month throughout your career, you could have roughly $1,920,000 in your 401(k) at retirement.
While very few employees remain with the same employer for their entire careers, it’s probably not unrealistic for anyone making $50,000 per year or more to put $111.33 into a retirement account each month. The money goes in pre-tax, and you get a match from your employer. Compound interest does its thing over time, and before you know it, you are left with more money than you ever thought possible.
Getting Started Saving for Retirement is the most Important Thing
I started my first retirement account with a whopping $25 per month and increased my monthly contributions over time. The most important thing was to get started. Whatever your financial situation, it’s important to start saving for retirement, whatever you can, and no amount is too small. Soon that $25 will grow to $111.33 and beyond. You may even get that employer match and double your money right off the bat.
It’s never too late to improve your retirement security. The longer you wait, the harder it will be to achieve total financial freedom. For more on what you should have saved at every age check out this post, How Much Should Gen X And Millennials Have Saved At Every Age? Given the choice, I hope you will opt for more retirement income rather than less.
Make this the year you get your financial house in order, reach out to see how we can help you reach financial freedom faster and easier.
Live for Today, Plan for a Richer Tomorrow.
DAVID RAE, CFP®, AIF® is a Los Angeles financial planner with DRM Wealth Management. A regular contributor to Advocate Magazine, Forbes.com, Investopedia not to mention numerous TV appearances. He helps friends of the LGBT Community across the USA get on track for their financial goals. For more information visit his website at www.davidraefp.com
If you liked Million Dollar 401k Mistake, you will also find this post valuable.
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Connect With David Rae, Financial Planner LA
David Rae, CFP® AIF®
President / Founder DRM Wealth Management LLC
1(323) 905-4380
david.rae@financialplannerla.com
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