Don’t Just Walk By That Dime On The Ground!

Have you ever been walking along the street and saw a dime on the ground?  Did you just walk right by, or did you stop to pick it up?  Heck, it’s only a dime, it’s not hardly worth the effort to bend over, right?  But what if it was a dollar?  Or a hundred dollars?  You wouldn’t just walk by that, would you?  What about $1,200?

Unfortunately, many folks do this very thing with their 401(k) plan employer matching funds.  Most employers that sponsor 401(k) plans provide a matching contribution when you defer money into the plan.  Often this is expressed as a certain percentage of your own contribution, such as 50% of your first 6% of contributions to the plan.

So if you make $40,000 a year and you contribute 6% to the 401(k) plan, that means you’ll be contributing $2,400 to the plan from your own funds, pre-tax.  Since your employer contributes 50% of your first 6%, you’ll have an additional $1,200 added to the account for the year.

If you can only afford to contribute 2% (or $800) to the plan, you’re still getting an additional 50% of your contribution added by your employer for a total of $1,200 for the year.  It still makes sense to participate even if you can’t maximize the employer contributions.

However, if you choose not to participate at all, you are giving up the extra money from your employer – forever.  You can’t go back and get this money later when you think you can afford to.  You’re essentially walking by that $1,200 that’s just sitting there on the ground waiting for you to pick it up.

Arguments against

After having this conversation with several folks, I’ve heard many different excuses to not take advantage of a 401(k) plan.  The excuses usually fall into a few limited camps, which I have listed a below.

It’s my money! You’re darn right it is!  And if you don’t participate in your 401(k) plan you’re throwing some of *your* money away.  Many times people believe that when they put money into a 401(k) plan, it’s gone for good.  Nothing could be more untrue!  The 401(k) plan is your property. All of your contributions and (as long as you’re vested in the plan) the employer contributions are yours to keep.  Granted, it’s locked up behind some significant fees and penalties until you reach retirement age (59½ in most cases) – but it’s still yours.

I don’t trust my company – they’ll go bankrupt and lose my money! As noted above, the 401(k) account is yours, not the company’s.  Even if the company goes bankrupt completely, as long as you haven’t invested your entire 401(k) plan in company stock (a la Enron), you still have your 401(k) plan intact.  They can’t lose your money, in other words!  It’s not theirs to lose.

I can’t afford to put money in the plan!  These days, money can be pretty tight (but when isn’t it?).  Unfortunately, regardless of how much money you make, it’s always possible to spend up to and more than what you bring home each payday.  The reverse of this is also true.  Within limits, it’s usually possible to make do with less.  If your paycheck was a dollar less every payday you’d figure out how to get by, right?  How about $78 less?

Using our example from above, for a single person with an annual income of $40,000 per year, before you participate in the 401(k) plan, your total income tax would be approximately $4,054.  If you chose to put 6% or $2,400 in your company 401(k) plan, your income tax would work out to $3,694 – $360 less.  So your take home pay would only reduce by about $78 per paycheck (if you’re paid every other week).  In return for this annual reduction of $2,040 in take-home pay, you’d now have a 401(k) account with $3,600 in it when counting the employer contributions.

Pretty sweet deal, if you asked me (but you didn’t, I just threw this in your face!).  For a total “cost” of $78 per paycheck, you get lower taxes PLUS a retirement savings account worth 75% more than what you had to give up.  Not too shabby.

One great benefit of participating in a 401(k) plan is that once you’ve made the decision to participate, you are deferring this income before it makes it into your hands. You don’t have to (or get to) make a decision about saving, it’s done automatically.  This helps you to get past one of the real difficulties that many folks face with saving: the money always seems to find another place.  This way it automatically goes into savings, before it can find another place.

The bottom line

The best and most important way to assure success in retirement savings is to put away more money over time.  Of course your investment returns will help, but if you don’t save the money, it can’t produce returns, right?  So do yourself a favor and don’t walk past that $1,200 that’s just lying on the ground!

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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