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The Match is Not the Max

Dear Pete,

I’m worried about retirement, after reading a recent article you wrote. I’m 30 years old and earn about $70,000 a year. I max out my 401(k) contributions at 4 percent. With the 4 percent I contribute, and the 4 percent my employer matches, that doesn’t seem like enough money to retire on. My account only has about $12,000 in it. On top of that, based on what I do for a living, my income will barely increase over the rest of my career. What do I do?

-Roy, Fort Worth, Texas

I have to give you credit, Roy. I see your situation quite frequently, but very rarely does a person realize what sort of trouble they’re in when they’re in it. You understand that something isn’t quite right. Based on the information you provided me, if you maintain your current contribution strategy, your 401(k) will provide you with approximately $1,170 per month in retirement income in today’s dollars, at age 67. That’s definitely not enough money to retire on.

We need to clear up a major misconception that you, and a large percentage of the American public, have hung your hat on — the match is not the max.

Repeat after me: The match is not the max, the match is not the max, the match is not the max.

I don’t know why. I don’t know when. And I don’t know how. But sometime, somehow and for some reason, people started believing they could contribute to their retirement plan only up to the employer match. For instance, Roy, you believe you can contribute only $2,800 to your 401(k) each year, based on your employer matching 100 percent of the first 4 percent you contribute to your account. That’s wrong. It’s very, very wrong. You can contribute $18,000 this year. And since your employer does match your first 4 percent, a total of $20,800 can flow into your 401(k) this year. As it stands now, your contributions combined with your employer’s contributions equal $5,600 per year.

You are not alone in your belief that you’re maxing out your 401(k).

The retirement plan industry has gotten itself into a bind in regards to communicating the importance of “hitting the match.” You hear it all the time — “hit the match.” The problem began in the 1980s, when pensions (defined benefit plans) began to fall out of favor with employers. For people to be able to retire without a pension, they needed to defer and contribute their own income into defined contribution style retirement plans. This was a culture shock. Before the beginning of the end of pensions, employees didn’t have much responsibility for the success of their retirement. The match has been used to incentivize people to participate and fund their own retirement. Unfortunately, many folks have simply heard “contribute up to the match.”

It would be incredibly difficult to retire by only hitting the company match, if the company match is equal to the national average (reports range from 2.7 to 4.7 percent). Most financial studies I’ve seen suggest a person must set aside 12 percent to 15 percent of their work income throughout their career, which includes the match, to have a successful retirement. If you’re only hitting the match, Roy, you are setting aside only 8 percent of your income (4 percent from you plus 4 percent from your employer). If you were to increase your contribution to 8 percent, then the total contribution would be 12 percent, which would put you within range of a successful retirement.

Increasing your contributions to 8 percent (total of 12 percent, with employer match) would change your income projections from $1,170 per month in today’s dollars to $1,665 per month. By no means does that solve your problem, but it’s a start.

From the moment you finish your first employee orientation at your first job, you’re on a mission to break your dependency on your income, so that you can stop working someday. Trust me, I know how ridiculous that sounds. Our careers aren’t solely about earning money. However, pleasantries aside, your income leads to expenses, and those expenses lead to a dependency on income. To stop working, you must break your dependency on your work income. You can achieve that by consistently deferring more and more income into your retirement plan at work. You kill two birds with one stone. You will accumulate assets that can create an income stream to replace your work income. And more importantly, by restricting your access to your deferred income, you will break your dependency on that income right now.

When you defer 8 percent of your income, you live on 92 percent of your income. Your goal is to increase the 8 percent and decrease the 92 percent. That’s how you’ll be able to retire. Not by having a bunch of money, but instead, by not needing a bunch of money.

The temptation to throw your hands up and not contribute what you should to your 401(k) is intense. Frankly, it’s the norm. In the next 30 seconds, you could list 10 reasons why you can’t do what you need to do. However, it behooves you to take the proper amount of time to find the reasons why you should contribute the proper amount. If you don’t fund your retirement properly soon, you will reach a point of no return. Action begins to address your problem. Inaction seals your fate.

The match is not the max.