Retirement Strategy: Maximizing Your Employer Match
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I recently read a report suggesting that if you are not saving at least 10 percent of your gross income, then your chances of outliving your nest egg in retirement are great—very great. What does this mean for your retirement strategy?
When your employer offers a matching contribution to your retirement fund, you have an opportunity to greatly increase your retirement savings and to save a substantial amount in less time. If you don’t use the offered money to its fullest potential, you aren’t getting the full benefits from your job.
Find out the maximum contributions
To get the maximum amount of savings matching offered by your employer, you must know how much of your own contribution is expected. If you have a Roth IRA or a traditional IRA, your contribution is capped at $5,000 a year. However, this is only your own portion of the contributions. Your employer can contribute that same amount each year.
With a 401(k), 401(b), a SIMPLE IRA, a ROTH 403(b), and other retirement fund types, annual contribution limits may be as high as $17,000 a year. If you aren’t able to pay that much into the fund each year, find out how much you need to contribute to get the highest possible contribution from your employer. You may find out that the employer’s contribution is capped at a far lower rate.
A common system is to match 50 percent of an employee’s contribution up until the yearly retirement contributions reach 6 percent of the employee’s annual salary. If you have this system, or a similar one, be sure you understand exactly how much you need to contribute in order to get that maximum employer contribution.
Understand your employer’s vesting schedule
Many employers offer matching retirement contributions on a vesting schedule. This means that the amount that the employer contributes is not fully yours until you reach a specific milestone of your employment
If you have been with a company for four years and the vesting schedule requires five years, consider keeping your job for another year in order to qualify for full retirement matching. It may be in your best financial interest to claim this money rather than leave the job for greener pastures. If you do leave early, the contributed money will be taken out of the account, which can leave you with a substantial loss to your retirement savings.
Get the right start with your retirement strategy
If you are just starting a new job that comes with retirement matching, be sure to sign up for this benefit as soon as you are allowed. Many employers have a waiting period until the matching program goes into effect. According to U.S. News and World Report, 29 percent of employers have a one-year waiting period before employer matching takes effect, and 30 percent have a one-month to six-month waiting period.
Find out exactly when you will become eligible, and sign up for the program as soon as you are. Delaying your admission into employee matching will leave you without the free money that your employer is offering.
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Jeff Rose is a certified financial planner and author of the blogs Good Financial Cents and Soldier of Finance. Learn more about his Roth IRA Movement that has inspired over 140 personal finance to educate young adults on the importance of saving.
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