I had a thought recently that made me wonder how much free money for retirement was given to me during my last job. My former employer was always generous in taking care of employees through the 401(k) plan offered. So just how much of our net worth could be attributed to that facet of saving?
I dug up my old 401(k) statements and expected the need to spend a lot of time breaking things down and then adding up all the numbers. To my surprise though, each statement kept an accumulated tally of the breakdown. So what I needed could simply be found on the last statement I received shortly after I retired from the company.
Although I knew I’d find it to be a sizeable chunk of money, I was blown away to see just how much. The free money for retirement I received from the company added up to $181,433.49! This was money they just GAVE to me.
I’d like to think that it’s just because they thought that I was awesome, but somehow I don’t think that’s the case. In fact, since the offer of free money for retirement was open to anyone, I’m relatively sure that’s not the case.
But let’s talk about how I got this money and just why it’s so incredibly valuable in your working career…
My free money for retirement
If you haven’t guessed, the free money for retirement I’m referring to was an employer match on 401(k) contributions. In this case, part of the money I received also included a type of profit-sharing into our 401(k) which I’ll talk about momentarily.
Here was the breakdown on my statement ending on March 31, 2019:
- Employer Match: $149,989.13
- Profit-Sharing: $31,444.36
- Total: $181,433.49
My employer offered a 25% match for every dollar you invested in the 401(k) plan. To be clear, there are a lot of plans that offer bigger matches – some even do dollar for dollar – but here’s the kicker… this one didn’t have a cap. You could contribute up to the federal limit each year and you’d be getting the match on everything you put in.
For instance, in 2020 the contribution limit is $19,500 ($26,000 for those 50 and older). If I was still working there and maxed out my 401(k) contributions for the year, I would have also received a match of $4,875. That’s a big chunk of change!
Then, the “extra credit” would show up after the year ended. For as long as I remember, we would receive a profit-sharing bonus into your 401(k). Here’s the catch though – it was a bonus of 10% of whatever you had contributed into the 401(k) the previous year. So if you hadn’t contributed anything, that’s what you got as a bonus(that stinks, right?!). But if you maxed out for the year, you came out ahead.
In essence, because the profit-sharing paid out 10% every year that I could remember, we were essentially receiving a total of a 35% match on all 401(k) contributions. The profit-sharing is also one of the reasons that I made sure to finish out the year before I left the company.
Assuming the profit-sharing pays out again after this year, those employees still there who are maxing out their 401(k) won’t just have a $4,875 match – they’ll have a $6,825 match for that year. $6,825 of money for retirement just for being a good saver!
Over the years, I continued to increase my 401(k) contributions and there were several years where I got close but still didn’t hit the federal max. Looking over my past statements, it was a little difficult to determine exactly when I started maxing out each year. However, I believe I started to hit that limit somewhere between 2006 and 2008.
That means for years I was getting a nice match every year, but then for more than a decade, I was receiving the maximum match every year. Not only was I saving a ton of money in the plan, but I was also getting a 35% return with each contribution. That adds up, folks!
The power of a company match
I’m sure you’ve heard people say that you shouldn’t pass up free money or that you’re leaving money on the table if you’re not taking advantage of an employer match. But did you ever stop to think about what that really means?
I was earning a 35% return on my money… even before any market returns!
Most of us are excited about the hope of simply getting a possible 10% return on our money in the stock market (before inflation). But then you also have to take into consideration that the return would be over the long haul and that it’s just an average based on historical data. An employer match though is an instant return on your money.
35% is a phenomenal return on my investment. But even if an employer match you’re offered is less, it’s still an immediate return on your money. And for what – choosing to save more money for retirement? Um, yeah, that’s what you should be doing anyway.
Of my entire $691,298.37 I rolled out of my 401(k) in early 2019, $181,433.49 was money for retirement that was just given to me. To put it in perspective, that free money alone accounted for over 15% of our net worth! We likely wouldn’t have been able to retire when we did without that extra boost.
Over the next 25 years, it’s reasonable to see that $181,000+ grow to be almost a million dollars… and I’m talking after inflation. That’s a lot of money for retirement that I essentially got for free!
Don’t pass up free money for retirement!
Look, I know not every company has the same matching program as I had the opportunity to participate in over the years. Some are better and some are worse. Most institute a cap on how much you can contribute. In my case, the match itself was decent but the real bonus was being able to continue receiving a match up to the federal limit each year.
Here’s what most places of employment are doing regarding company matching…
The majority of companies offer some sort of matching contribution for an average of 4.3% of a person’s pay, but there are many formulas out there. The most common match was 50 cents on the dollar. For every $1 you contribute to your company 401(k), your company will contribute 50 cents. About 71% of companies with matching contributions contribute 50 cents for every dollar employees contribute up to 6% of their pay. Another 21% match employee contributions dollar for dollar, but the maximum is normally lower—commonly 3%.Investopedia
My wife, Lisa, had a 401(k) plan at work that offered a 25% match, but only up to 3% up to her salary. That not great, but we absolutely contributed that 3% before moving onto any other investment vehicles. Why? Because that was a guaranteed 25 cents in free money for every dollar invested. That’s a 25% return on the money that was contributed.
The point is that most employers offering a 401(k) plan offer some type of match.1 That’s an instantaneous return on your money before it even has a chance in the market to grow further. Passing that up really is like leaving good money on the table.
I don’t know of a lot of guaranteed investments that pay you returns like 35%, but if you do, please send me the exclusive!
It took me a handful of years of my two-decade career at my last place of employment to realize just how valuable the match is for your portfolio. If I had realized it earlier, that $181,000+ the company gave me would have been even greater.
If you’re not taking advantage of every penny of free money for retirement offered to you, it’s time to sit down and figure out why. Maybe you legitimately can’t contribute any more money into the plan and that’s ok. But don’t fool yourself into making that an excuse if there’s an area where you might be able to trim the fat a little. Every dollar you can funnel toward your 401(k) plan while getting that match is well worth it.
I find it a little funny that this was the first time I looked at the actual numbers from my old 401(k). I knew that I was getting some solid money for retirement for nothing, but these numbers are a real eye-opener.
If you’re working for an employer who offers a 401(k) plan with a match, I hope you’ve seen some great results over the years as well!
Thanks for reading!!
1 Vanguard 2018 Defined Contribution Plan Data (pages 20-21)