How to Stop Living Paycheck to Paycheck (4/5): Why You Should Maximize Your Employer’s 401(k) Match
In the journey to stop living paycheck to paycheck, one of the smartest financial moves you can make is taking full advantage of your employer’s 401(k) match. While it might not provide immediate benefits today, this strategy can significantly impact your financial future. In fact, over 25 years, it could add nearly $100,000 to your retirement savings.
What is a 401(k) Match?
If your employer offers a retirement contribution match, this means they will match a portion of the money you contribute to your retirement account. For example, if you earn $50,000 annually and your employer matches 3% of your salary, they’ll contribute an additional $1,500 per year to your retirement account. If you achieve a 7% return on this investment over 25 years, that $1,500 per year could grow to about $94,000. And if you’re also contributing to your account, your retirement savings could double that amount.
Why You Shouldn't Wait
The longer you wait to start contributing, the less time your money has to grow, and the less you’ll benefit from your employer’s contributions. Missing out on these contributions is essentially leaving free money on the table.
Traditional vs. Roth 401(k)
Employers may offer two types of 401(k) plans: Traditional and Roth.
Traditional 401(k): Contributions are made with pre-tax dollars, reducing your taxable income for the current year. However, this money is taxed when you withdraw it during retirement.
Roth 401(k): Contributions are made with after-tax dollars, meaning they’re taxed like regular income. The advantage is that when you withdraw the money in retirement, it’s tax-free, including any gains. This option may be better if you expect to be in a higher tax bracket when you retire.
Roth 401(k) vs. Roth IRA
While both Roth 401(k)s and Roth IRAs offer tax-free withdrawals in retirement, there are key differences:
Roth 401(k): Employer-sponsored with a higher contribution limit of up to $23,000 per year, plus catch-up contributions if you’re over 50.
Roth IRA: Individually established with a lower contribution limit of $7,000 per year, although this limit may increase if you’re over 50.
Start Now to Reap the Benefits
While contributing to your retirement plan might reduce your take-home pay today, the long-term benefits far outweigh the short-term sacrifice. By starting early and taking full advantage of your employer’s match, you could potentially add an extra $100,000 to your retirement savings—money that’s essentially free.
This is why contributing to your 401(k) ranks so high on the list of steps to break free from living paycheck to paycheck. It’s a powerful tool to secure your financial future.
