Who couldn’t use a little luck of the Irish when it comes to money? Fortunately, you don’t have to go looking for a four-leaf clover to get lucky with savings.
Sixty-nine percent of millennials who are working full time have access to a 401(k) or similar retirement plan, according to Transamerica Center for Retirement Studies research. And the majority of companies include employer matches. In other words: free money.
“It’s magical stuff, but it’s hard to get people started,” said certified financial planner Harriet Brackey, director of investments at GSK Wealth Advisors in Hollywood, Florida. “Retirement is such a distant concept for younger people. A lot of people miss the opportunity to make themselves millionaires simply by saving.”
Under current IRS limits, you can put up to $18,000 of pretax dollars in a 401(k) plan this year. But even if you can’t max out your contributions it’s a good idea to put some of your paycheck toward your retirement account, since even small contributions add up over time, Brackey said. And earnings on that money will grow tax-deferred, meaning you won’t pay taxes on them until you take money out of the plan.
For many employees, companies offer an added incentive to contribute: a match. Almost three-quarters of the employers surveyed by the Society for Human Resource Management last year that offered retirement accounts also offered an employee match. On average, they matched up to 4.5 percent of employees’ salaries dollar for dollar.
“One of the big misunderstandings is around employer contributions,” said certified financial planner Edward Leach of Highland Financial Advisors in Riverdale, New Jersey. “Check to see how much your employer will match and maximize that because it really is free money.”
An easy way to get started and stick with it, said Leach, is to set up automatic contributions to your retirement account from each paycheck.
Not only can you get lucky with your savings by receiving free money from an employer match, but you’re also lucky to have time on your side. With another 30 to 40 years ahead of you in the workforce, a little coin now can add up to a pot of gold later.
Let’s say you’re 25, make $60,000 a year and have an employer that matches your 401(k) contributions dollar-for-dollar up to 4.5 percent of your salary. You chip in the match maximum of 4.5 percent, which is $225 per month, or $2,700 per year, under this scenario and your employer matches your contributions. Assuming an average portfolio return of 7 percent, that $225 per month doubled by your employer’s match would grow to more than $1.1 million over 40 years! That’s not even counting all the raises and additional contributions you’ll make over your career. (You can use Bankrate’s 401(k) contribution calculator to see how contributing to your employer’s retirement plan will affect your take-home pay.)
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When it comes to saving and planning for your retirement, Brackey recommended you start with a 401(k), then contribute to other tax-advantaged retirement accounts like IRAs, as you continue to build your savings. “Time is on your side,” she said. “Those of us who are older wish we had that.”