At Extreme Investor Network, we understand that investing can be uncertain, with the stock market fluctuating and returns not guaranteed. However, there is one outlier in the realm of investing that can provide a sense of security: the 401(k) match.
What exactly is a 401(k) match? It’s when an employer makes a matching contribution on an employee’s retirement savings, up to a certain cap. This is often referred to as free money, as it can essentially double the employee’s contributions.
For example, if a worker contributes 3% of their annual salary to their 401(k) plan, the employer might add another 3% to the worker’s account. This dollar-for-dollar match up to 3% means the investor is doubling their money, equivalent to a 100% profit.
Kamila Elliott, a certified financial planner and co-founder of Collective Wealth Partners, describes a 401(k) match as “one of the rare guarantees on an investment that we have.” She compares it to a scenario in Vegas where you put $1 in a slot machine and get $2 out every time – you’d probably be sitting at that slot machine for a long time.
According to a 2023 survey by the Plan Sponsor Council of America, about 80% of 401(k) plans offer a matching contribution. The most common formula is a 50-cent match for every dollar a worker contributes, up to 6%. This means a worker saving 6% of their pay would receive another 3% as a company match, totaling 9% in their 401(k).
Vanguard notes that getting a guaranteed return of more than 50% on an investment is rare, making a 401(k) match a valuable opportunity for growth. They emphasize the importance of taking advantage of employer matches, as the value can add up significantly over time.
Financial advisors typically recommend saving at least 15% of your annual salary if you have access to a 401(k), factoring in both worker and company contributions. This can help you build a substantial nest egg for retirement.
However, it’s essential to be aware of any vesting requirements that may come with a 401(k) match. Around 60% of companies require employees to stay for a few years before the match is fully theirs. Those who leave before that time period may forfeit some or all of their match. The remaining companies offer immediate vesting, meaning the money is yours right away.
At Extreme Investor Network, we believe in empowering you to make the most of your investments. By understanding the value of a 401(k) match, you can take advantage of this unique opportunity for secure growth in your retirement savings.