Why you should blow-off your employer’s 401k match

We’ve become obsessed with the match. “Pete, I hit the match.” Okay, enough. That’s great. I brush my teeth. You are supposed to hit your match. How much time should I spend celebrating your unwillingness to ignore extra compensation opportunities? Despite what we’re led to believe, an employer match isn’t an incentive for us to save for retirement, it’s a process to weed out people who are terrible at math.

The match, if you don’t know, is what your employer is willing to contribute to your retirement plan, based on what you contribute to your retirement plan. For instance, if you contribute 3% of your annual income to your retirement plan, your employer may match your contribution by also contributing 3% to your retirement plan. This is free money. You can try to argue about vesting schedules, illiquidity, or anything else you want, but the reality is if you don’t do what it takes to maximize the match, you should barely be considered employable. I wouldn’t want to hire someone who doesn’t hit the match. This is exactly why I want you to stop focusing on the match. I want you to blow it off.

Hitting the match is as elementary as brushing your teeth. Brushing your teeth isn’t a goal. You just do it. Hitting the match isn’t a goal. You just do it. You are probably wondering what’s beyond the match. If I’m asking you to blow it off, then I must be asking you do something in addition to the match. You are correct. But we need to continue to get weirder for a moment.

“Pete, I put 10% of my income into my retirement plan.” Okay. Why? “Well, I figure it’s a round number, and it just seems to make sense.” Yes, it is a round number, and no, it doesn’t make sense. Why would a round number make sense? Your retirement plan will be used to replace your income when you retire. What do round numbers have to do with anything? Your goal isn’t to live in a world of round numbers and cute rules of thumb. Your goal is to be able to stop working some day. Ask yourself, what in the world will saving 5% or 10% of your income do for you, come retirement time. Nothing. It will do nothing. This isn’t to kill your buzz or ruin your day. As I’ve discussed before, your retirement will be different from your parents’ and grandparents’ retirement. Your retirement will be possible only if you break your dependency on your income, and defer tremendous amounts of money into your retirement plan.

In 2014, you can defer $17,500 of your income into your company sponsored retirement plan (if you are under 50 years old). Your goal is to do that. I’m not kidding. To think your retirement will go well without it, is dim. Here’s an example:

If you were to save $17,500 every year, starting today, for 35 years, at an 8% rate of return, you’d end up with $3,015,544. If you were to distribute 4% of that money to yourself in retirement (4% is widely considered to the right amount of money you should withdraw from your retirement investments on an annual basis), you’d receive $120,622 per year gross. Great, huh? Well. You have to pay taxes. Let’s estimate a 25% effective tax rate. That brings your net income to $90,466. What’s that? You’re wondering about inflation? Me too. If money loses half of its buying power every 25 years or so, then your $90,466 is going to feel more like $40,000 in today’s dollars. Yes, I made lots of assumptions, and contribution limits and tax brackets will change. But the point of this is to give you a general idea of what you’re up against. By the way, feel free to use our retirement calculator to run your own scenarios.

What if you contributed $8,000ish per year?

Looks like your inflation-adjusted retirement income will be less than $20,000 per year. I hope you like radishes. Because your yard garden will be your source for food. You can’t expect to continue your current financial lifestyle, within reason, if you don’t put good money away for the future.

The biggest complaint I hear in this regard is ‘Pete, your retirement savings expectations are unrealistic. Who can afford to save that much?’ There’s a ton of failed thinking with this complaint. Here’s what I know, if you don’t save this money, you won’t be able to have a reasonable retirement. I know that $3 million and $1.3 million seems like a lot of money, but 35 years from now, it’ll be a lot less than you think. Additionally, if you get frisky and distribute your assets at a rate higher than 4%, then you risk running out of money.

This chart is a Monte Carlo simulation from my book, Mock RetirementIt’s based on a 60% stock and 40% bond asset mix during retirement. I ran 5,000 simulations, using historical market data, to determine the success rate of your retirement for different distribution rates. If you think an 8% chance of failure is no big deal, would you get on a train if the conductor announced prior to leaving the station, “This train has an 8% chance of crashing. Enjoy the ride.”? I’d be off that death train faster than you could possibly imagine.

Retirement doesn’t feel real for anyone who’s 15 years or more from retirement. Because of this, we don’t really do the math. And the further out we are from retirement, the more we depend on something mystical to happen to change our financial future. Mystical things don’t happen to change our financial paths. Your retirement will only work if you blow off your match. Your goal is to max out your retirement plan, not hit some silly match that tricks you into thinking you are doing something about your retirement problem.

3 thoughts on “Why you should blow-off your employer’s 401k match

  1. I recently found your blog and am still deciding if I should trust your advice or not. Problem is that your audience seems to be people who still have 35 yours until they retire. Or, are you also using a long term just to make the numbers look impressive. Maybe you are just missing the real audience of people interested in reading about retirement.
    Still on the sideline.

  2. This is scary. I have zero contributed to retirement (my wife has a 401k and pension – hopefully). I don’t know that I’ll ever be able to sack away that kind of money in the next 25 – 30 years (I’m 43).

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