Retirement saving—with help from your employer
It’s not every day that you get something extra for your money. Unless, of course, you have a retirement plan that offers an employer match. The match literally pays you to save—for every dollar you put away through your plan, your employer contributes a portion on your behalf.
Today, more than three-quarters of retirement plans offer matching contributions.1 In fact, it’s the most influential factor in getting workers to save through their employer plans.2 When you add employer contributions to your contributions, your savings can really add up.
Matches are expressed in terms of the percentage of your salary your employer will contribute on your behalf—and all employer matches aren’t the same. An example of a simple match formula is 100% of the first 4% that you contribute. This means that your employer would match your contributions, dollar for dollar, up to 4% of your salary. So, if you contribute 4% of your salary, your employer will contribute another 4%, putting a total of 8% of your salary in your retirement plan.
Some formulas are a little more complicated, offering a partial match—for example, contributing 50% up to the first 6% of pay you contribute. With this formula, you’d be contributing 6% of your salary, and your employer would put in half that—or another 3%. This puts a total of 9% of your salary in your retirement plan, even though you only put in 6%.
If you’re age 50 or older, the IRS permits you to contribute more to your retirement plan—with catch-up contributions. Some employers may also apply their matching contributions to catch-up contributions. The important thing is to find out which type of match your employer offers—and take advantage of the full benefit. Today, an estimated one in five eligible retirement plan participants aren’t contributing enough to receive their full employer match—saying no to extra money.3
Retirement plan match scenarios
Let’s look at what it could mean if you miss out on a portion of your company match. Assume your salary is $50,000 and you contribute from age 25 to age 65. In our example, your employer matches 50% up to the first 6% of pay you contribute.
This chart is for illustrative purposes only. It assumes a $0 starting balance, bi-weekly employee contributions of $76.92 (4% contribution) or $115.38 (6% contribution), and a 7% rate of return. For someone contributing 4% for 40 years, this equates to employee contributions of $80,000, employer contributions of $40,000, and investment earnings of $541,042. For someone contributing 6% over 40 years, this equates to employee contributions of $120,000, employer contributions of $60,000, and investment earnings of $811,563. Figures are based on assumptions as set out, and individual circumstances may vary.
If you decide to contribute 4%, instead of the 6% needed for the full match, by age 65 you’d be missing out on $20,000 in employer contributions if we assume a 7% annual rate of return on your investment. You’d also be losing $270,000 in compounded savings and you’d have $330,000 less in your account at retirement. Of course, our example doesn’t take into account that your salary would likely increase over time, making the probable gap even greater.
To be sure you’re not leaving money on the table, consider contributing at least the maximum amount your employer will match. Of course, contribute even more if you can—the match formula boosts your contribution, but it isn’t a recommendation for how much to save. Many guidelines say you should be saving 10% or 15% of your paycheck for retirement, but very few match formulas go that high.4
What about retirement plan vesting?
The contributions you make are yours, from the time they go into your account, and, with some plans, employer contributions are yours immediately as well. But with many plans, employer contributions typically become yours on a vesting schedule, which means they may gradually become yours over time. If that’s the case for your plan, it means you’ll need to continue working a specific period of time for your employer before you take full ownership of your matching contributions. Ask your employer for your plan’s vesting schedule. More than a third of plans offer immediate vesting at enrollment1—with others, you’re 100% vested after a set number of years.
Let your retirement plan—and your employer—work harder for you
Be sure you meet your match if it’s part of your retirement plan. And if you enrolled a while ago, and aren’t sure of your employer’s match, contact your human resources department for details. Taking advantage of employer contributions is like getting extra money in your retirement savings—and who wants to pass that up?
1 Defined Contribution Plan Industry Report, PLANSPONSOR, 2019. 2 “U.S. Retirement End-Investor 2020: Helping Participants Navigate Uncertainty,” Cerulli Associates, June 2020. 3 “Many Miss Out On the Full Company Match,” PLANSPONSOR, September 2017. 4 "Ultimate guide to retirement," CNN Money, 2020.
The content of this document is for general information only and is believed to be accurate and reliable as of posting date but may be subject to change. John Hancock does not provide investment, tax, plan design or legal advice. Please consult your own independent advisor as to any investment, tax, or legal statements made herein.