If You Want Free Money, Max Out Your 401(k) Contributions

Everyone claims they want more money, but few of us are doing the things we need to do to make more money. If you are like most Americans, you are losing out on free money in your company 401(k).More than two-thirds of employees are failing to max-out their 401(k) contributions. This one decision could cost you hundreds-of-thousands of dollars, or more.

Compound Interest Should Be Your Best Friend

Retirement accounts help you leverage the power of compound interest to increase your savings. Compound interest is the interest earned on the interest from the principle you originally invested. This is why it’s so hard to catch up on your retirement savings. One hundred dollars you could have invested five years ago is worth much more than that same one hundred dollars today. If you want to try and make up for not investing that money in your retirement account five years ago, you would need to invest at least $122. In ten years it will cost you $148 to match the earning power of that original $100. When you don’t max out your 401(k) contributions, you are passing up on all of the interest you could have earned. You are also passing up another benefit.

Employer Matching

Many employers match a portion of what you contribute to your 401(k) up to a certain amount or percentage. If you aren’t at least contributing up to the employer matching limit, you are declining free money.You don’t have to work any harder to get this extra money from your employer. All you need to do is complete the paperwork so that each paycheck you are contributing at least to the limit that your employer will match. If you fail to take advantage of this program, you are also missing out on all of the interest those free dollars could earn. As an example, if your employer contributed $1,800 to your 401(k) every year for 25 years, and you never got a raise, you would earn $79,761 over that time, assuming a 4% interest rate. That is just from what your employer contributed. If you also contributed $1,800 each year, your retirement account would total $159,522, with $65,922 of that money being interest.

Maximum Annual Contributions

The best decision you can make for your future self is to go beyond what the maximum employer match amount is. You should be contributing the maximum amount allowed into your 401(k) each year.
This one decision makes time work in your favor. The longer you have until you retire, the more interest you will earn. While it is possible to catch up later in life, it is much more expensive. It is easier to live on less take-home income today than it will be in five, ten, or fifteen years. You will have to contribute much more to make up for the lost time and interest.
Maxing out your 401(k) contributions is like signing up for free money. You will receive more from your employer, and you will earn significantly more each year in interest.