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According to a report on Vanguard’s 2013 Defined Contribution plan data, “The average total participant contribution rate in 2013 was 10.2%”. This 10.2% figure includes both the employee and employer match averages for 2013. It is important to note that of this 10.2% total, 4.1% was the average promised match from employers in 2013.
When I do enrollment presentations for the participants of my 401(k) clients, -
"I always encourage them to contribute 10% of their income to their 401(k) accounts. Quite simply if their employer offers a 4% match then they should contribute 6% for a total of a 10% contribution." - A featured quote on GoBankingRates.com.
If your employer offers a smaller match, such as a match of 2%, then you should strive to contribute 8% in order to hit your target of 10%.
Taking full advantage of an employer’s match can make a huge difference in your ending account balance, especially over a long period of time. Let’s assume the following 2013 figures from the Vanguard Defined Contribution Report to run through an example.
An employee making $50,000/year
Contributing 6.1% of their salary or $3,050/year
Employer match of 4.1% or $2,050/year
For a total of $5,100/ year
By taking advantage of the full employer match this employee earned an extra $2,050/year and potentially saved even more in taxes depending on whether or not the 401(k) account was treated as pre-tax. Let’s extrapolate this same example over 30 years using an average rate of return of 6%/year.
An employee making $50,000/every year. (Assuming no raise in salary).
Contributing 6.1% of their salary or $3,050/every year
Employer match of 4.1% or $2,050/Every year
For a total of $427,389 after 30 years
Employee contributed a total of $91,500 over 30 years
Employer contributed a total of $61,500 over 30 years
It is clear to see that if you are not taking advantage of your employer’s FULL match, then you are leaving a lot of money on the table. In this scenario the employee was able to walk away with a 401(k) account worth$427,389 in which they only contributed a total of $91,500. If you are not doing so already, then I encourage you to take advantage of your employer’s full match and strive for an overall contribution rate of 10%/year.
Raymond James Financial Services, Inc.
Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Any hypothetical examples are for illustrative purposes only. Actual investor results will vary.