Employer-Matched Retirement Plans
Step 2 of my personal finance road map is to contribute to an employer-matched retirement plan (step 1 was to create a budget). Let’s cover this in a few Q&As:
Q: What is an employer-matched retirement plan?
A: An employer matched retirement plan is usually a 401(k) or sometimes a 403(b) if you work in non-profit or a SEP (simplified employee retirement plan) IRA if you work at a smaller company. As it implies in the name, your employer provides the retirement account option, and for a percentage or amount you contribute from your paycheck, your employer matches it.
Q: Why should you contribute to an employer matched retirement plan?
A: It is literally FREE money! For example, if your employer will match up to 3% of your contributions, if you put in 3%, your employer will match that 3% and now you have 6% of your pay check amount in your retirement account! There are different structures, and you have to get the details from your employer but a 3% match is fairly common.
Q: What if I contribute a different amount than the match amount?
A: I highly recommend you don’t contribute less than the match amount, if you contribute less, you are leaving money on the table. If you want to contribute more, that’s great! Usually 3% is the cap at which your employer will match, so if you want to put away 10%, your employer will still match 3% and you’ll have 13% going towards your account.
Q: What if I am trying to pay off debt or save aggressively?
A: If you have high interest debt, I suggest you still contribute your employer match amount-again, you don’t want to leave money on the table! – but above that amount, you put towards paying down high interest debt. Other scenarios where you’d want to contribute the minimum-if you are saving aggressively for something like a home down payment, or you have too high of living expenses to contribute more (in that case, you should take a look at your budget).
Q: How much can I contribute to my employer matched retirement plan?
A: This answer varies from year to year, but for 2017 it is capped at $18,000, with those over age 50 getting a “catch-up” adjustment of an extra $6,000.
Q: What is “vesting”?
A: Vesting or vesting schedule is how much ownership you have over the shares of the employer matched contribution. It is usually based on number of years of employment. It is possible to lose the employer-matched part of your contributions if you leave the company (voluntarily or involuntarily) before they are fully vested.
You never lose the contributions you make.