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Retirement Planning

Your 401(k) plan: What does it mean to have matching contributions

Matching contributions are a benefit extended by some employers to encourage employees to save for retirement.
If someone offered to give you two dollars in exchange for one, would you take it? The truth is, if your employer is willing to match your 401k contribution, and you're not taking it, you're essentially walking away from free money.

The value of matching contributions

Many employer-sponsored 401(k) plans (as well as other defined contribution plans) come with the added bonus of a matching contribution. This can be a percentage of your salary or what you choose to contribute, or even a match of 50 cents of every dollar you contribute (up to a set maximum). But to really see the value of matching contributions over time, let's look at an example provided by the Financial Industry Regulatory Authority (FINRA).1

Dan, a 30-year-old worker makes $40,000 and contributes three percent of his salary ($1,200) to his 401(k). In this example, we're going to assume that Dan continues to make the same salary and same contribution each year until he's age 65. After 35 years, Dan will have contributed a total of $42,000 to his 401(k). Now, let's assume Dan gets a dollar-for-dollar match (up to three percent of his salary) from his employer. Taking full advantage of the match, Dan will essentially double his savings. So instead of having set aside $42,000 by the time Dan retires, he'll have $84,000.

As you can see, taking advantage of his employer's match, Dan increased his 401(k) contributions by 100 percent! Moreover, by making a contribution to his 401(k), Dan is reducing his current taxable income because he'll pay no taxes on what he contributes — including the matching contribution — until he withdraws his money in retirement.

This is just an example of how much you may be able to save by taking advantage of employer contribution matching (your situation may be different according to your type of plan). To see how much you may be able to save by taking advantage of employer matching, try using Bankrate.com's 401(k) savings calculator.

For more information on retirement plans and how to save for retirement, visit the Protective Life Learning Center.


1. http://www.finra.org/investors/alerts/why-leave-money-table%E2%80%94make-most-your-employers-401k-match

 

WEB.1657.06.15

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