Stay the course with 401(k), even without a match
If you can, you should increase contributions
Dear Pete
My employer just cut our 401k match completely. They used to match 100% of our first 6%, but now they’re contributing absolutely nothing. I keep telling my wife that if they’re not gonna match, we shouldn’t put any money in either. Can you help me to explain why to her?
Darren,
Raleigh, North Carolina
No. But I can help her explain to you why you should not only keep contributing, but you should double your contribution.
I’m sorry they cut the match, and I’m sure it’s incredibly frustrating for you. Employer matches have been used as carrots to influence employees to save for their future. It’s in everyone’s best interest if you are properly prepared for retirement, but it benefits you more than it benefits anyone else. That fact doesn’t change once the employer match stops.
You have to remind yourself of the point of a company-sponsored retirement plan match. It's meant to help you save for retirement. Notice I didn’t say it's meant for you to help your employer save for your retirement. It’s your responsibility, not theirs.
I don’t know how old you are, Darren, but if you’ve been putting in 6% and receiving a 6% match throughout your career, you’re on track for a beautiful retirement. That means you’ve been partially responsible for 12% of your annual income going into your retirement fund every year. To me, that’s perfect. I like for people to set aside a total of somewhere between 12% to 15% of their gross income throughout their career, as long as they start early. And 18% to 20% is the correct amount if a person gets started later than they should have.
If your employer isn’t able to help via the 401(k) match, then you have to pick up the slack, not drop the rope altogether. In other words, you are the only entity getting hurt when you let your contribution level fall below 12%. It doesn’t impact your employer at all, and even if it did, why would you care? Your goal is to retire successfully, plain and simple.
Let’s take a look at some math. Let’s say you earn $60,000 a year. That means you put $3,600/year ($60,000 x 6%) into your 401(k), which is $300 a month. Your employer was doing the same on your behalf. Now, without your employer's march, you should increase your contribution level to 12%, or another $300 a month. Do this if you have a healthy emergency fund (three months of expenses) and you’re confident about your employment and income stability.
It’s also worth noting why your employer likely suspended their 401(k) match program. They probably did it to save jobs. It wasn’t an act of malice but of compassion, believe it or not. Need more proof? A 6% match is significantly higher than the national average of roughly 4.7%.
I don’t know when companies will start matching once again, but when they do, you can lower your increased contribution back down to the appropriate level. It’s quite possible the match returns but in a different form. Be on the lookout for those details, once these difficult times have passed.
Never forget, funding a successful retirement is the most difficult financial task you will ever accomplish. It requires decades of discipline and resolve, a tad bit of luck, and a structured distribution strategy. And as hard as it is to acknowledge while you’re going though the current realities of the world, you have to.
There absolutely will be people who experience a major retirement plan setback during this recession, but you don’t have to be one of them. You can virtually guarantee you won’t be a victim of this time by avoiding the unforced error of stopping your contributions.
Increase your contributions and save.