Free Money? No Thanks.
I’m sure I’m not the only one who’s hopped on a retailer’s website to do a little browsing only to be met with a pop-up box asking for my email address in order to “receive offers & savings.” Your only options are to either input your email and subject yourself to endless spam or select the ever-snarky “no I don’t like saving money” button. No, West Elm, it’s not that I don’t enjoy saving money, it’s that I don’t enjoy deleting 8 emails a day about your new items added to the clearance section. But, if I’ve learned anything in my adult years it’s that I should make my words sweet, for I will likely eat them in the near future. So, here is my snarky “don’t you like free money?”
I want to make sure I am very clear in what I am about to say. If you work for a company that offers a retirements savings plan along with a company match and you are not taking FULL advantage of that match YOU ARE GIVING UP FREE MONEY. Now, as a financial consultant this felt pretty common sense to me, but the more clients I met with the more I realized that this concept is far from common sense. So, let me break it down. Company retirement plans vary from one company to another depending on factors such as company size, number of employees, employer preferences and so on. The most common company retirement plans that we see are 401(K) plans, Simple IRAs and SEP IRAs. The first you’ve likely heard of, the second two maybe not. Typically, only full-time employees are offered participation in the company retirement plan, but that is not always the case. Participation is not mandatory although some companies do have an opt out type plan that requires their employees to physically choose not to participate else they be automatically enrolled.
There are a few different benefits associated with company retirement plans, some monetary and others psychological. As I mentioned before, there are many different types of company plans and they are all quite customizable making it difficult the generalize. Today, I’m discussing features of some of the most common and basic retirement plans, such as the ones listed above. The first benefit is the tax deferred treatment of the money added to the plan. When you elect to have a portion of your before tax pay contributed to your company retirement plan that money is tax deferred meaning you will not pay taxes on the money until it is removed from the tax sheltered account someday in the distant future. For example, if you are paid $100/pay period (simple math) and you are in a 10% tax bracket (let’s exclude employment tax and any tax deductions for simplicity purposes) $10 of taxes will be taken out of your paycheck before you even receive it leaving you with a $90 paycheck. On the contrary, if you elect to put 10% of your income into your company 401(K) plan you will only pay $9 in taxes, $10 will be added to your retirement plan and you will receive a check for $81. Although that $10 added to your plan is intended for future use, it still belongs to you leaving you with $91 rather than $90. Tax deferral is also very important when you start bumping up against higher tax brackets (a conversation to be had with your accountant). When you reach retirement and begin taking money out of your tax deferred retirement plan you then pay taxes on it. It is assumed that you are likely in a lower tax bracket at this time as you no longer have earned income. Rather than paying 10% in taxes maybe you’re only paying 5%.
The next benefit associated with company retirement plans is a psychological one. If you’re a Dave Ramsey follower at all you know that he plays a lot on the psychological side of saving; I am definitely more of a numbers person, but if the numbers make sense and there is a psychological benefit to it, I’m all ears. When you choose to defer part of your pay into a company retirement plan you never see that money. That $25 per paycheck or whatever it may be never ever goes inside your bank account. You never have to look at it and then choose to put it aside and not spend it. The choice is already made for you and the company took the money out before even writing your check. I don’t know about you, but once that money hits my bank account it’s significantly harder to then take it and put it away. We all like to believe we are very strong, committed people, and maybe it’s more often a matter of forgetfulness than irresponsibility, but saving money automatically without having to choose it over and over again is a much more reliable option for the majority of us.
And now for the big one. The reason I wrote this entire post. Most company retirement plans offer some sort of employer match. What this means is that the company has chosen to match, on some scale, what you have elected to put into your retirement plan. The amount and the requirements vary by company, but often times the plan will be structured something like this, “for every 1% you contribute we will match you up to 5%.” That means your company is offering to give you up to an additional 5% of your gross income for free. All you have to do to get that entire 5% is contribute 5% of your own gross pay. That’s it! That’s all you have to do! And that money still belongs to you! It’s just being put aside to grow for your future. Simple right? Would you believe me if I told you that there is an insane number of people out there who say “no” to this?! I don’t even think you have to give them your email address! Free money, people. Saved for your future benefit. Now, as I said before, every company’s plan is going to be structured a little differently; maybe they’ll contribute 1% for every 2% you contribute. Whatever the requirements may be, these plans are designed to help you save money for your future and if the company is offering to throw a little extra on the top you’d be crazy not to take advantage of that. My husband’s company, for example, pays out their match in company stock. We always re evaluate and rebalance once it’s in his account depending on how the company is performing, but there’s nothing wrong with that. It’s still free money.
If you work for a company that offers a retirement plan, I hope your HR representative is hounding you on participating. The specifics on investing inside your retirement plan are unique to you and your situation and something that you should certainly chat with a professional like myself about, but getting the money into that plan is the most integral part. If you never put anything in there it doesn’t matter how awesome the investments are that you elected. Now, there are certainly people out there living paycheck to paycheck who simply cannot afford to give up any current income. If that’s you, let this be a goal for you and remember that saving money is all about delaying gratification. What can you live without today in order to make a better future for yourself? So, there’s my snarky “I don’t like free money” button for you. If you work for a company that doesn’t have an employer retirement plan, stay tuned, I’ll talk soon about how you can prepare for retirement without one. I am hoping you take a few things away from this post, but if you only take one let it be that if you are not taking full advantage of your company’s retirement plan match you are saying “no” to free money, and everyone wants free money!
