Throughout the career of a Gen X or Y-er, we will commonly work for a multitude employers. How many of those employers have you worked for that offered a 401k plan and, regardless of the length of your tenure, you chose to not participate? Of those plans that you opted out of, how many offered a company match? How many years did you elect not to participate? The questions I am asking may not be applicable to you. However, if it does apply, you will want to have a thorough understanding of the financial impact of a company’s 401k plan to your future.
During my career, I have heard from some clients the following reasons they chose to not participate(not including the situation where an employer doesn’t offer one):
1) This is a temporary job and I 'won’t be here long enough for 401k plan contributions to matter.
2) Right now it is more important that I increase my take home portion.
3) I feel more comfortable investing money in my IRA brokerage account.
4) I don’t know what a 401k is and I don’t want to take the time to learn. I don’t know what questions to ask and I am intimidated by the verbiage and choices within the plan. So I am just going to ignore it all together.
I’m not here to judge the validity of any of these reasons, as they are common why some employees choose not to participate in their company’s respective plans. But let me ask you….have you considered the cost of not participating? Let’s take a look see.
In this example, let’s assume that an employee makes $40,000/yr and contributes 5% into their company’s 401k plan. This equals an annual contribution of $2,000. If the employer matches even 50% of that contribution, the total yearly contribution would then be $3,000. Over a span of 10 years, assuming the investments would return an average of 6%, the total compounded value would equal $50,559.
So regardless of the reason for not participating in your employer’s 401k plan, this is an example of the money you are opting out of….leaving on the table. Who couldn’t use that $51,000 in their life?
Let’s now consider the same scenario, but removing the employer match……the result would equal $33,706. That is a difference of $16,853! So by not participating in your company’s 401k plan, not only are you giving up the ability to have your $20,000 ($2,000 contribution for 10 years) grow into $33,706, you are also ignoring $16,853 of free money from the company! How many of us would walk by a $100 bill laying on the ground and not pick it up? If you answer is not me, then I have to ask why would you walk by $16,853?
Unless your employer doesn’t offer a 401k plan, there is no good reason to not participate. Any money that you leave on the table now will not be there for you to use by you in the future when you need it. If you need help understanding what a 401k plan is, how it works, investment options, etc, reach out to me and we can discuss.
Choosing to do nothing is a costly decision that will impact your and your family’s future.