Former Beatle Ringo Starr had a big hit in the early 1970s with a song titled "It Don't Come Easy." And Ringo was right. Most things don't come easy, especially accumulating wealth. There's a reason why the expression "hard-earned money" is used so often.
But money isn't always hard to come by. Here's an easy way for 87 million Americans to make a lot more money.
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The easiest way to make money you'll find
More than 88 million Americans in private industry work in a job with employer-sponsored retirement plans, based on data from the U.S. Bureau of Labor Statistics (BLS). Roughly 99% of employees are in 401(k) plans where the employers match employee contributions, according to Vanguard, one of the largest 401(k) plan providers. This implies that more than 87 million Americans have access to an employer 401(k) match.
For all practical purposes, these 401(k) matches are free money. All you have to do is contribute to your retirement plan. Your employer then kicks in additional dollars. It's arguably the easiest way to make money you'll find.
Exactly how much employers match varies, though. Around 62% of workers with Vanguard 401(k) plans have single-tier match formulas. For example, the most common approach is where the employer matches $0.50 for every dollar contributed by the employee, up to 6% of their pay.
However, many employers match dollar for dollar up to a certain percentage. Vanguard's data shows that 10% of its 401(k) plans use this approach on the first 6% of an employee's pay.
These matches can really add up over time. Suppose a person making the median U.S. salary of around $54,000 contributes 6% of their pay, with the employer matching $0.50 on each dollar contributed. Assuming an average return of 7%, over a 30-year period those matches would compound to more than $160,000. And that's without any salary increases factored into the calculation.
A few details
Is this too good to be true? Nope. However, there are a few details you should know.
In many cases, the matched amounts don't belong to the employees right out of the gate. More than half of 401(k) participants are in plans that use vesting schedules, according to Vanguard. With vesting, employees' ownership of their 401(k) matches increases over time. The idea is to encourage workers to stay with their employers.
The most common vesting schedules require employees to remain with the employer for five or six years before they're 100% vested. However, some employers have shorter vesting periods.
Withdrawing employer matches from a 401(k) plan before age 59 1/2 also comes at a high cost. The Internal Revenue Service will impose a 10% penalty on such withdrawals, with only a few exceptions.
Too many missing out
You'd probably think that nearly everyone with access to a 401(k) match would take advantage of this great opportunity to make more money easily. Unfortunately, that's not the case.
Roughly 25% of Americans who work in jobs with employer-sponsored retirement plans don't participate in those plans. And not all those who do participate in 401(k) plans contribute enough to receive the maximum employer match.
That's one of the worst 401(k) mistakes you can make. Social Security almost certainly won't be enough to maintain your standard of living in retirement. Employer 401(k) matches are a great way to help build wealth.
Most things in life don't come easy. But this is an exception where too many are missing out.
