How many opportunities in life do you get to score free money? If you're like most people, not many. Sure, you might get some cash back from your credit cards for making purchases, but for the typical consumer, we're not talking about a life-changing sum.
But what if there were a way to score so much free cash that it could actually set you up for a financially secure retirement? Believe it or not, such an incentive actually does exist, provided you make one smart move with your 401(k) plan.
Are you snagging your full employer match?
Not everyone has access to a 401(k) for retirement savings purposes. But if you have one of these plans available to you, then chances are, it comes with some sort of matching incentive. And that match could end up being more important than you'd imagine.
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Say your employer will match contributions to your 401(k) of up to 3% of your salary. If you earn $72,000 a year, that means that if you put in $2,160 a year from your own earnings, your company will put that same amount into your retirement plan.
Now you're probably thinking, "That's nice, but I can't retire on $2,160." And that's very true. But the thing about all 401(k) contributions, including any funds you get from your employer, is that you have the opportunity to invest that money for added growth.
So let's imagine you decide to invest your 401(k) heavily in S&P 500 index funds. Based on the S&P 500's historical performance, it's not unreasonable to think you might snag an average annual 8% return in your 401(k), which is actually a bit below the index's average.
Now, let's assume that your salary never changes (which is unlikely, but let's go with it for simplicity purposes) and that you contribute enough to your 401(k) to snag a $2,160 employer match over a 35-year period. If you invest that money at an average annual 8% return, you'll end up with about $372,000 based on your employer contributions.
That's right -- that $372,000 doesn't even account for any money you're putting in out of your own paychecks, or growth on that money. And that's why claiming your full employer match is such an important thing to do. It's not just a matter of getting your hands on free cash -- it's a matter of having more money to invest with over a long period of time.
Don't pass up a prime opportunity
When you're first starting out in your career, carving out money for 401(k) plan contributions can be difficult. But if you don't put in enough money to claim your full employer match, you're basically saying no to what could be thousands of dollars every year.
In fact, 401(k)s are very difficult to max out because they come with such high contribution limits -- $19,500 a year for workers under 50 and $26,000 for those 50 and over. And so you'll often hear that if you can't max out your 401(k), you should at least put in enough money to grab your workplace match in full. It's a strategy that could serve you very well if you employ it over a long period of time.
