Should I Use My 401(k)?
We go into step 4 of our 10 steps to financial freedom. We talk about when you should use your 401(k).
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Step 4 is Get Your Employer Match
Save enough to get the full company match, then you can move on to step 5.
Most matching structures are set as a percentage of income, typically between 3-10% of your pay. If you don’t know what your matching structure, ask HR or a senior employee. A common matching structure is:
“We match 100% on the first 3%, then 50% on the next 2%”
Feel like we are back in math class. Basically, if you contribute 5%, the company matches 4%.
Getting a matching contribution makes a huge financial impact.
We will use the matching structure above with someone making $60,000 a year. This person would contribute 5% ($3,000/year) and the company would match 4% ($2,400/year). This $2400 is an instant return to you!
Projected out over 10 years that could would be just under $100,000. If you didn’t get the match, it would be just over $50,000.
Projected over 30 years the difference between match and no match would be $1,000,000 vs $565,000.
What if I don’t have a matching contribution?
If you don’t have a matching contribution, you can go to step 5.
If you have an employer plan, it is still beneficial to sign-up for the account and set contributions to zero. Some employer plans automatically set your contributions, and this is a way to check that. Also, you may get profit-sharing contributions, and you will want to know if you have money in that plan.
Why not do more than the matching contribution?
There are different savings options that are superior to the 401(k) and they should be considered before doing any more in the 401(k). A Health Savings Account (HSA) offers amazing tax benefits, and an Individual Retirement Account (IRA) offers similar benefits without the negatives of a 401(k).