Working for a living has its perks. There's the paycheck, for one. And, equally important, are the health benefits and those free contributions to your 401(k). Unfortunately, those company-funded deposits to your retirement account may not be around forever.
Companies globally are struggling to adjust to a mass slowdown of economic activity, as people stay inside to contain COVID-19. Travel and hospitality businesses have been hit particularly hard, and those business leaders are looking for ways to stay solvent through the crisis. One expense that's on the chopping block is the employer-funded 401(k) matching contribution. Travel-booking company Sabre, Marriott International, Amtrak, and Macy's have all announced delays, reductions, or suspensions to their 401(k) matching programs.
According to a 2019 Vanguard report, the average employer-match contribution is 4.3% of employee pay. That's $2,150 in free money annually for every $50,000 of income. There's no good way to spin that loss; it slows down your retirement savings, plain and simple. If your employer announces a suspension of matching contributions, take these three steps now to keep those retirement savings on track.
1. Check your retirement savings progress
If you're saving 15% of your income and you have 10 years or more until retirement, a short-term suspension of employer-match shouldn't change your timeline. The suspension does become problematic if you're currently behind on your retirement savings -- because at that point, every penny counts.
One simple way to evaluate your savings progress is to lean on experts' age-based savings benchmarks. Fidelity, for example, recommends you save:
- One year's salary by age 30
- Three years' salary by age 40
- Six years' salary by age 50
- Eight years' salary by age 60
- 10 years' salary by age 67
Assuming your salary is $60,000 today, you should have around $180,000 in your 401(k) by your 40th birthday. At age 67, you're aiming for $600,000 in savings. If those numbers are vastly higher than your reality, don't shrug off the loss of those employer-match contributions. You'll need to update your retirement savings plan to catch up.
2. Consider other places to save
To start, decide if your 401(k) is the best place for you to increase contributions right now. Without employer-matching contributions, your 401(k) still has the perks of tax-deferred earnings and tax-free contributions. But you can get those same tax advantages by saving in a HSA if you qualify. You're eligible for a HSA or Health Savings Account if you carry a high-deductible health plan with an individual deductible of at least $1,400, or a family deductible of at least $2,800. In 2020, you can contribute up to $3,550 to a HSA as an individual, or up to $7,100 as a family.
Your HSA delivers one tax benefit the 401(k) doesn't, and that's tax-free withdrawals for qualified medical expenses. Considering that the average retired couple is estimated to spend nearly $300,000 out-of-pocket on healthcare costs, that tax benefit could be significant over your lifetime.
Another strong competitor to the 401(k) is a Roth IRA. Roth IRA contributions are not tax-free. But unlike the 401(k), you can withdraw your Roth contributions at any time without taxes or penalties.
Having access to your funds in an emergency is an advantage if you're worried about losing your job in the near term. Earnings in a Roth IRA are tax-free, too, as long as you don't withdraw them until age 59 and a half. And, relative to your 401(k), you may find better investment options within a Roth IRA.
Roth IRA contributions are subject to income limitations. If you make less than $139,000 as a single filer or $206,000 as a married filer, you can contribute up to $6,000, plus an extra $1,000 in catch-up contributions if you're 50 or older.
3. Increase your own contributions
Once you land on the right place to save, increase your retirement account contributions by at least what you've lost from the suspension of employer-match. And if your savings aren't tracking close to those age-based benchmarks, go with an even larger increase.
Don't let market conditions scare you off, either. Equities today are priced well below their historic highs. That means your higher contributions now are positioned well to benefit from an eventual market recovery.
Come back to your 401(k) when employer-match returns
If you do lose your employer match in this economy, it's likely a temporary situation. Plan on reevaluating your retirement contributions once that employer-match returns. There aren't too many definitive rules of retirement saving, but this is one to remember: You should always max out your employer match. It's free money.