by Beth Henary Watson
Retirement savers often misunderstand how much they are allowed to save through their employer’s plan. Here at Corner Post Financial Planning, we frequently come across workers who believe they can only save up to the match amount.
Setting aside “enough to get the match” is common advice from human resource departments and personal finance scribes, who note the folly of leaving the match money on the table.
Let’s review a common scenario. With a typical employer matching program, a company will contribute half of what a worker saves up to 6 percent, or 3 percent. In that case 9 percent of earnings are invested. If a worker makes $50,000, his contribution plus the employer’s totals $4,500.
Here’s a two-income situation. Say you have a husband and wife who are working and earning $50,000 each, both with access to retirement plans. If each contributes 5 percent and gets a 2.5 percent match, they are saving 7.5 percent of their combined salaries, a total of $7,500 per year. With no other retirement income streams outside Social Security, they may be hard pressed to keep up their lifestyle once they quit work.
Both of the savings plans outlined above fall short of the 10 percent to 15 percent of income financial planners recommend saving for retirement—and percentages that low may only apply to those who start early enough.
Few realize that the IRS employee contribution max for those under age 50 is $18,500 for a 401(k), 403(b), or 457 plan. SIMPLE IRAs have lower limits, but most plans offer “catch up” opportunities at age 50. In our above scenario, the worker making $50,000 might find it a big stretch to contribute $18,500 to a retirement account, but he is certainly not prohibited from saving 10 percent or 15 percent.
A recent project of the Employee Benefits Research Institute1 found that average salary deferrals hover around 10 percent across income levels, meaning many workers contribute less than 10 percent. Or nothing at all.
It’s unfortunate that the “match” number—whatever it may be—gets batted around so often that it becomes “the” number to know. Employer contributions of any size to retirement plans are commendable, to be sure, but employees should be aware that there may be little connection between the match percentage and how much they need to set aside for retirement.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Beth Henary Watson is an LPL Financial Planner and Marketing Director with Corner Post Financial Planning. Reach her at beth@cornerpostfinancial.com.
1) Employee Benefits Research Institute, "401(k) Employee Contributions Above $2,400, A Possible Rothification Threshold," October 2017.