Does your employer offer retirement matching, but you just don’t have the breathing room to use it?
If so, you need to look at your budget yesterday. Retirement planning has changed a lot in the last few decades, with very few people having access to the defined benefit plans and the pensions of old. Gone are the days when people in the private sector could go to work for one company for 20-30 years and have a realistic expectation that the company would take care of them for the rest of their life. People are living longer and spending more dollars per capita on health care, and the responsibility has strongly shifted from the government and employers onto the shoulders of employees. This has resulted in the prevalence of both defined contribution plans, where your employer will give you $X towards your retirement instead of promising a pension, and individual retirement accounts, where at most your employer will match some of your contributions but you have to contribute some of your own salary as well.
Both of these kinds of retirement accounts have significantly shifted the responsibility onto you as an employee to take care of your own retirement. The government will give you some tax advantages, your employer might help you set up an account and might even help you fund it, but your retirement is now your responsibility. You have to fund the account, you have to manage the account, you have to direct the investments (or hire an advisor to do it for you), and you have to know the different rules about contribution limits and distribution requirements. You are responsible for your own retirement, so what can you do about it? Maximizing employer matching is a great place to start.
So what is employer matching?
Employer matching involves your employer agreeing to match your retirement contributions up to a certain amount. How much and in what way varies depending on the particular agreement, but it is generally in the 2-4% range. Sometimes it is a straight dollar-for-dollar match, and sometimes it will be a direct match up to a point and then a reduced amount. For example, exact matching up to 2% and then .50c on the dollar up to 4%. In this scenario, you maximize your retirement savings by contributing 6% directly to your retirement, with your employer contributing 4%.
Employer matching is essentially free money towards your retirement. It’s a great deal for employers, as it removes the retirement burden from the company, who no longer has to manage and invest money on behalf of their employees, which also reduces their overhead, their liability, their responsibility, etc. If you don’t take advantage of the matching funds, they go into your employer’s pocket. And even if you really like your boss, you also have to take care of you and yours, which means maximizing your retirement savings and earnings. Given that you should be saving some money for retirement anyway, with standard minimum percentages being 10-13% of your earnings, taking full advantage of employer matching is an excellent way to accelerate your retirement fund. With a lot of employers allowing you to deduct the amounts directly from your paycheck, the money will just go straight to your retirement account without you needing to worry about writing a check.
Sounds great, but I need all of my paycheck now! What can I do?
This is where I preach the pay-yourself-first ideology. As I have written about before, people generally know how much they make but not what they spend. If you ask them to save money at the beginning of the month it is easy, but by the time the end of the month rolls around they have no idea where their money went. Perhaps this might help; there are a lot of rules and regulations about being able to guarantee investment returns, but employer matching is the only guaranteed way to double your investments, and is therefore the quickest and most effective way to increase your retirement savings.
There is also tax treatment to consider. Earnings that are earmarked for retirement will reduce the amount you currently owe in income taxes, but you will still have to pay Social Security and Medicare taxes on them. As for the employer matching, those monies count as a tax deduction for the employer. Also, employer matching can help with budgeting because it effectively lowers how much you are getting with each paycheck. Maybe you don’t go out to eat as often. Maybe you cut the cable or say goodbye to HBO and Starz. Somehow or another, because you will be making less money now, you will have to budget accordingly. Again, your retirement is now no one’s responsibility but your own, so you must be proactive and take the appropriate actions now to ensure there is a nest egg for you to retire on later.