Companies like to offer up a plethora of rewards and benefits to stand out from their rivals and attract new graduates to their organization.
How about flexible working? Perhaps a day off on your birthday? Free smoothies or cakes on Friday? A pool room, cycle-to-work scheme or free strokes for the therapy dog?
All rewarding and beneficial but perhaps not as consequential for your life going forward as an employer-sponsored retirement plan 401(k).
Okay, it’s a title which probably does not whet the appetite like Waffle Wednesdays and, anyway, you’re in your early twenties and full of vim and vigor. Who wants to be thinking of retirement now?
Well, that future version of yourself – the one with less hair and thanks to those waffles more bulk – will thank you for signing up to a 401(k) plan from the first day you walk into your new office. Because it simply means getting access to free money.
What is a 401(k)Plan?
It is a retirement savings plan offered to you by your employer. The actual plan can vary from employer to employer but essentially it is a way of you and your employer contributing to your retirement.
A 100% employee match plan means that for every $1 you contribute to your retirement plan at work then your employer will also put in $1. In a partial match plan, for that $1 you put in, the employer will add in 50 cents.
So, let’s say you want to set a contribution of 5% of your salary every month as part of the 401(k) plan. If you earn $5,000 a month then that means $250 of your wage will go into your retirement plan.
The employer in a 100% match plan will also add in $250 or in a 50% partial match they will put in $125.
You may think – hold on, that means I have reduced my wage every month by $250! I could get tickets to that concert or snap up that brand new computer game I’ve been eyeing up.
That’s true of course, but just think about what your employer has just done. They have doubled your $250 instantly. It is free money. A bonus without having to really work for it! And you get it month after month after month.
Okay, you don’t see the money now, but it will sit in your retirement account gaining interest, year after year until you retire.
There are limits to how much you can put into these plans. An employer’s generosity can only stretch so far! Also, an employee shouldn’t be putting every cent into the plan when they are starting out on a new career in a new city.
According to Fidelity, a typical setup is for employers to contribute $1 for every $1 an employee contributes up to 3% of their salary, then 50 cents on the dollar for the next 2% of an employee’s salary.
Get 401(k) Savvy
An employer offers these plans because they want to attract graduates and retain them as the years go by.
They are not mandatory and there are plenty of employers who don’t offer them.
So, when talking to prospective new employers make sure that they have a 401(k) plan and when you get the job start contributing and grab that free cash!
It’s part of your benefits, so don’t leave it on the table.
That future self of yours creaking away in a luxurious rocking chair will be smiling.
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