You may be surprised by the answer.
Understanding your 401(k): How it works and why it matters.
What is a 401(k) plan? Key benefits and how to maximize your savings.
If your goal is to retire peacefully, one of the best moves you can make this year is to get your entire 401(k) match, or as many matches as possible. This can be worth thousands of dollars today, which is already a pretty nice bonus. But that’s just the beginning.
Once you invest that money, it can sit in your 401(k) for decades before you take it out again. That way, even a small amount of $1,000 can turn into a much larger amount.
How much will your 401(k) match be worth by the time you retire?
Your 401(k) match is usually a percentage of your income. For example, if you qualify for a 3% dollar-for-dollar match and your annual income is at least $33,000, you’ll qualify for a $1,000 employer match. However, that money is only yours if you deposit the first $1,000 into your 401(k).
If you don’t have a lot of cash, this may seem impossible. But it can be a worthwhile investment. You get a 100% return on your investment by claiming a $1,000 employer match (your $1,000 contribution becomes $2,000 when your employer matches your $1,000). That doesn’t take into account the investment income you’ll accumulate between now and retirement.
No one can predict how well your investments will perform over the long term, but the stock market’s average annual return over the long term is 10%. Using this as a baseline for how fast a $1,000 401(k) match will grow, we get the following results:
Source: Author’s calculations. All values are rounded to the nearest dollar.
This is a fairly wide range and shows that the longer your savings stay in your investments, the more you save. A $1,000 match invested for 40 years could easily cover one year of retirement, especially when combined with Social Security.
If you consistently bank your 401(k) match every year, your savings will grow even faster. It does require some sacrifice at this point, but if you have the money, the potential benefits make it worth it.
If that’s not possible, consider claiming at least a portion of your 401(k) match to enjoy some of the benefits outlined above. And don’t forget to increase your 401(k) contribution rate as your income increases.
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