When approaching a new job opportunity, one of the many considerations to keep in mind is the employer’s retirement plan offerings – namely, whether they have one and whether they provide an employer match. If you are already sitting pretty and employed, it’s just as important to be familiar with the plan offerings of your current employer.
There are many different plan types strewn about the working world, from 403(b)’s in the non-profit sector to 401(k)’s on the private side of things. Each plan has different upsides and downsides, all of which should be investigated thoroughly, but a somewhat consistent perk is the above mentioned employer match.
First things first
So what is an employer match, exactly?
Basically, it’s money offered by the employer that goes towards a participating retirement account instead of your paycheck. However, to incentivize its employees to contribute to their own future, many employer matches only kick in if the employee is also setting aside some money from their paycheck towards the same account.
Every employer is different, and some are more generous with their contributions than others. It’s important to try and claim the full employer match because it’s free money left on the table if you don’t – essentially reducing the total salary/benefit package offered by your employer!
Let’s explore a couple of examples to illustrate how employer match can come into play.
Example A: Maximizing employer match
Jill works for a non-profit that offers a 403(b) retirement plan. This type of plan is generally limited to non-profits, certain employees of public schools, and sometimes by other municipalities.
For our purposes here, let’s skip worrying about whether Jill should consider making her contributions Roth or Traditional.
Jill reads about her benefits package and determines that she is eligible for employer match. When she contributes up to 6% of her salary to her 401(k), her employer will match her contributions at a rate of 50%.
Let’s assume Jill understands that employer match is part of her benefits package and wants to maximize hers. To do this, Jill signs up to contribute 6% of her gross pay each pay period towards her retirement account (working out to be 6% of her salary throughout the year). Because she is contributing the 6%, her employer matches 50% of that amount, or 3% of her salary. By agreeing to set aside some of her paycheck, Jill is able to boost her retirement savings to 9%!
Had Jill decided to only contribute, say, 4% of her salary, her employer would only match with a corresponding 2% contribution. On the other hand, if Jill contributes more than 6% of her salary, her employer match will still max out at 3%.
Example B: Comparing retirement benefits
Bill is fresh out of school and has been offered two different jobs. He likes both of the employers, the work should be pretty comparable no matter his decision, and they are both near to the area he lives. Bill is planning to contribute 10% of his salary toward his retirement account. Which position should he choose to accept?
Employer A offers a salary of $45,000 and a 401(k) match of 100% of the employee contributions up to 5%.
Employer B offers a slightly larger salary of $46,500 and a 401(k) match of 50% of the employee contributions up to 3%.
Ignoring some other important details for now (such as the vesting period of the 401(k) plans and the stock options offered by each one), Bill decides to choose Employer A because of the generous retirement matching benefit.
With Bill’s personal retirement goals in mind, the total compensation from Employer A ends up being $47,250 while Employer B only comes out to $47,197.50. While not a huge difference on paper at the start, the difference in total compensation amounts to greater year-over-year savings and ultimately greater compound growth within Bill’s retirement accounts!
Example C: You're welcome, Future Self
It’s important to remember that claiming the full employer match doesn’t mean you’re done in the savings department!
Let’s circle back to Jill from our first example, but a few years in the future. She has landed a job where her employer offers to match 100% of her retirement contributions up to 3% of her gross salary. Her salary is a neat $60,000; after taxes, she will take home a net salary of about $49,000.
Jill shares an affordable apartment in a mid-sized city with two roommates. Her portion of the rent and utility bills works out to about $1,200 per month, or $14,400 per year, leaving her with about $34,600 for the rest of her spending and saving throughout the year. She owns a modest car with a low insurance payment, and doesn’t yet have any of the expenses that might come later in life, such as those associated with pets or kids.
Given her current situation, Jill has decided to make a concerted effort towards maximizing her retirement savings while she is young. Knowing the benefits of compound interest, she will endeavor to contribute much more than just the 3% needed to receive her full employer match. Jill has decided to invest 25% of her gross salary (including employer match) into her retirement account each year!
Jill speaks with her employer and asks to increase her contributions to 22% of her gross paycheck, which will amount to $13,200 invested over the course of the year – and she will still have $21,400 (net salary minus retirement contributions) to spend on food, entertainment, and any other expenses she may have. As mentioned previously, her retirement savings rate becomes an effective 25% of her total pay when you factor in the 3% employer match, bringing her annual retirement savings to $15,000.
Assuming that her retirement portfolio will grow at an average rate of 8% per year, the $15,000 invested in just this one year should grow to more than $300,000 by the time she reaches traditional retirement age. If she keeps up with a similarly ambitious savings rate, she will have a very secure future!
One more thing to consider
Another great aspect of employer matching is that the employer contributions don’t count towards yearly maximum contribution limits.
In the case of a 401(k) plan in the 2019 tax year, an individual can only contribute up to $19,000 of pre-tax income (unless they are 50 or older, as they are then allowed an additional $6,000 of contributions to help “catch-up” their retirement savings). If you are in a very well paying position, or are financially secure enough to be able to contribute $19,000 despite it being a large percentage of your total salary, an employer match allows you to go beyond that $19,000 limit within a single tax year.
So there you have it! Employer matching is part of your total compensation package – and helps encourage good savings practices.