Employers will often make a contribution to an employee's 401(k) savings plan. If that contribution is a function of the employee's contribution, it is critical that the employee save the necessary amount to get the employer match.
- Let's talk about saving for retirement. If you're 25 years old and planning on accumulating a retirement nest egg, the best time to start saving is now. - In fact, regardless of how old you might be or when you're going to retire, the best time to start saving is now. - The reason to start saving now is that you can let your money do some of the retirement savings work, so that you don't have to. Albert Einstein, a relatively famous guy, once said that "Compound interest is the eighth "wonder of the world.
"He who understands it, earns it. "He who doesn't, pays it." - If you are 25 years old and would like to accumulate $1,000,000 when you retire at age 65, making some reasonable assumptions, you would need to save about $1,080 each month for 480 months. - Now, that sounds like a lot of money, particularly when you're young and starting out. But the point of this video is that you may not have to save all that money yourself. Many employers make what is called a 401(k) employer contribution.
- The 401(k) employer contribution is the amount of money your employer contributes into your 401(k) fund. The name 401(k) comes from the section of the tax code that was created in 1978 to govern these types of retirement plans. - In the old days, like in the 1980s, many employers offered what were called pension plans. You worked for a company for a long time and when you retired, that company paid you a certain amount each month after you retired. The pension plan was part of your compensation package.
- But as the workforce has become more mobile and workers change jobs more often, I read recently that the average person changes jobs 10 to 15 times during her or his career. As a result, the relevance of pensions has gone down. People just don't stay with an employer long enough for a pension to accumulate to very much money. - So Congress created 401(k) retirement savings plans. Your 401(k) plan goes with you when you change jobs. You put money into your 401(k) plan, your employer can put money into your 401(k) plan, and it accumulates and is taxed when you start withdrawing it upon retirement.
- Which brings us to the 401(k) employer contribution. If your employer has a policy of contributing to your 401(k) savings plan, you need to think long and hard about making sure that you do whatever it takes to get that contribution. - The 401(k) employer contribution portion can vary from being a fixed percentage of an employee salary to being some sort of a match of what the employee contributes to the 401(k) plan. - For example, a common match is you save a dollar and put it in your 401(k) and your employer will match dollar for dollar up to 6% of your salary.
Think about that. That is an immediate 100% return on your investment, 100%. - Another common ratio is a 50% match up to, say, 6% of your salary. Our employer, Brigham Young University, does an 80% match up to 4% of our salary. In other words, we put 5% of our salary into our 401(k) and our employer puts in 4%. That's an immediate 80% return on our investment. - So back to our retirement example. You're 25 years old and you want to have $1,000,000 when you retire.
You need to save $1,080 per month to get that done. But wait. Your employer has a 401(k) dollar for dollar match up to 6% of your salary. - Assuming your salary is $72,000 per year, that's $6,000 per month, if you contribute 6% into your 401(k) plan, that would be $360. And your employer contributes an additional $360. Then you're up to $720 right there. You would need to contribute an additional $360 to get to the target amount of $1,080.
- Now, that additional $360 can come from your salary or if you have a spouse or a significant other, it can come from their income. There are an number of ways to save that additional $360. The point is this. In this example, you needed $1,080 per month and your employer contributed $360 of that amount. - Since the 401(k) match is often a part of your overall compensation package, you're leaving money on the table if you don't take the match. And taking the match early in your career will allow your savings to be working for you throughout your career.
- So take the match. - Take the match. - Take the match.
Skill Level Beginner
Q: Why can't I earn a Certificate of Completion for this course?
A: We publish a new tutorial or tutorials for this course on a regular basis. We are unable to offer a Certificate of Completion because it is an ever-evolving course that is not designed to be completed. Check back often for new movies.