A Rare Case of Free Money

There are all types of sensational financial “headlines” on websites and other places. Financial sensation of the questionable type is usually designed to grab our attention to sell something. For example, at this very moment, I see a prophecy (using that word facetiously, of course) that the “Dow Will Plummet to 6000.”

That prediction is on a banner ad on a financial media webpage, so it must be true, right? Although anything including Dow 6000 is possible, market history, market trends, and common sense tell us that sensational banner ad is probably just trying to stir us up to buy a book, a subscription, or something like that.

So you might imagine my knee-jerk reaction to the following headline on a well-known financial website today: “This long-term investment leads to a guaranteed 100% return on Day 1.” Usually I would have been suspicious. But knowing the website to publish credible content, I knew the article wouldn’t be a gimmick. I clicked on it.

The headline was a catchy, accurate way to describe many 401(k) plans.

Financial wisdom says to participate in a 401(k) plan, if available, especially if the employer makes matching contributions. For example, a 401(k) plan might be set up whereby the employer matches the employee’s contributions up to 3%. Therefore, if you put in 3% of your pay into your 401(k), your company will put in the same amount for you also. Other 401(k) plans match a percentage of your contributions up to a certain point.

Regardless of the plan’s specifics, it is generally wise to take advantage of a company’s maximum match. The matching money is essentially free. You could think of it as a pay raise through the back door. The article with the catchy headline went on to explain, however, that many folks are not utilizing the handy financial tool of matching contributions.

A 2015 study by Financial Engines found that Americans are leaving a heap of money on the table by not taking advantage of their companies’ matching 401(k) contributions. The study reports that 25% of employees miss out on receiving their companies’ full match by not saving enough. “The typical employee failing to receive the full match leaves $1,336 of potential ‘free money’ on the table each year… With compounding, this could amount to as much as $42,855 over 20 years,” the study concludes.

As a retirement plan, a 401(k) is designed as a long-term investment account. Your paycheck will be less to the extent that you contribute part of your earnings into the plan. Therefore, contributing up to the maximum matching limit may not be feasible in everyone’s case.

It is good to periodically review your contributions and your employer’s contributions in your 401(k) plan (if you have one). If you are not already doing so and if possible, consider striving to bump up your retirement savings to get all of the matching contribution, especially since “free money” is involved. This is a rare case indeed!

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