If there’s one thing the personal finance community wholeheartedly agrees on, it’s that you should contribute at least enough to your 401k to take advantage of the full 401k employer match.
A 401k match is the closest thing to free money that you can get, and those employer contributions will make a huge difference at retirement!
I know 401k’s aren’t the most exciting thing to talk about, especially when Tik Tok stars are claiming that they’re a scam and you could be spending that money now, living it up!
A 401k is definitely not a scam, and you should probably stop getting all of your financial advice from 20-year-old social media stars. In fact, The National Study of Millionaires found that 80% of them contributed to their employer’s 401k plan!
And the cool thing about most 401k plans today is that most employers will split the heavy lifting of saving for retirement with you, in the form of 401k matching contributions.
While a 3% dollar-for-dollar 401k match may not sound like much, those contributions compounded over a 30 year career will make a huge difference in your retirement nest egg.
In this post, we are going to quantify the true impact of a 401k match and explain why you absolutely, no questions asked, need to be taking advantage of it. I don’t care how much debt you have, what the interest rates are, or if you need to get 5 roommates to make it happen, but make sure you get your full 401k match!
If you’re not motivated to start contributing to your 401k to take full advantage of your company’s match, you will be after reading this article!
Delaying some gratification now so that you can have a big, bright future tomorrow will pay off big.
What is a 401k Match?
A 401k match is really just code for “free money.” And this is the only instance where the free money is actually free (in exchange for your time and effort at a job, that is).
A 401k match means that your employer will match all or a portion of what you put into your 401k.
For example, let’s say you make $50,000 per year and contribute 5% of your salary to your 401k. Your employer will match that same 5%.
If you’re paid biweekly, you would contribute $96.15 per paycheck. Additionally, your employer would contribute another $96.15 per paycheck on your behalf, if you choose to to contribute that 5%.
If you choose not to contribute to your 401k, not only are you losing out on the chance to build wealth with your own money, you also lose out on those employer dollars going to work for you as well!
Every employer will have their own policies about their 401k match. Consult your HR department if you’re not sure about your 401k matching contribution benefits!
401k Matching Contribution Rules
As with all tax-advantaged accounts, there are some rules. The IRS sets the rules and penalties for 401k’s, and your employer chooses the plans, providers, and matching policy.
Some employers may require you to wait a few months before you’re even allowed to start contributing to your 401k and/or recieving an employer match. I personally think this is BS, but we don’t really have control over it.
Just make sure you sign up for the plan as soon as you are able to!
Here are a couple other rules to be aware of when signing up for your company’s 401k plan:
Contribution Limits
401k’s are such powerful wealth building tools that the IRS sets an annual limit to how much you can contribute! Okay, maybe they just want to make sure they get enough tax revenue, since you and your employer will save money on taxes for every dollar you put into your 401k.
(And as a general rule of thumb, if the IRS wants to limit your contributions to something, it probably means it’s a really good deal).
In 2023, you individually can contribute up to $22,500 (or $27,000 if you’re over 50) of your own money to your 401k per year. Your employer matching contribution does not count toward this limit.
However, there is also a total annual 401k limit of $66,000 for 2023. Your 401k employer match and all after-tax contributions do count toward this limit, along with your contributions.
Vesting Schedules
Your employer will also determine the vesting schedule for your 401k. The vesting schedule shows you when you’ll have full ownership of all the funds in your 401k (including your 401k matching contributions).
If you leave the company before you’re fully vested, you forfeight all or a portion of your employer’s contribution to your 401k. Just to be clear, you will always 100% own the money you have put in, plus the growth, no matter what.
Some companies simply have a date (usually 2-5 years after you’re original date of hire) when you’re fully vested.
Others will do it on a schedule. For example, you could be 50% vested after 2 years and 100% vested after 4. If you quit after year 2 but before year 4, you only get to keep half of your employer matching contributions.
Related: 6 Must-Know Questions to Ask About Your 401k Plan (What Beginners Really Need to Know)
How a 401k Employer Match Works
There are a few different ways an employer can use a 401k match. The matching amount is calculated from your pre-tax salary and divided by the number of pay periods you have.
That amount is then deducted automatically from your paycheck, combined with your employer matching contribution, and invested on your behalf in your 401k.
Here’s how a few different 401k matching plans work:
Dollar For Dollar Match
A dollar for dollar match means that your employer puts in the same amount that you do. An example of this is if you put in 3% of your salary and your employer contributes another 3%.
Each dollar you put in (up to 3% of your salary), gets a guaranteed, 100% match.
You can think of a dollar for dollar match as a guaranteed, immediate, 100% rate of return! You won’t get that anywhere else!
This is why I’m such a big proponent of everyone investing at least as much to get their full 401k match, no matter how much debt you’re in.
Partial Match
A partial match is similar to the dollar for dollar match, except that the employer will match a percentage of your contributions instead of the full amount.
Some employers may match 50% of your contributions, up to a percentage of your salary. Maybe your employer will match half of your contributions up to 10% of your salary. So if you put in 10%, they will put in an additional 5%.
A partial 401k match is still a great deal! You can think of this as a 50% (or whatever percentage they match) guaranteed, immediate, 100% rate of return. And you still won’t find a rate of return that good anywhere else!
Non Elective 401k Match
Maybe the best type of 401k match is the non elective one. In this scenario, your employer will put money into your 401k on your behalf, and you don’t have to do anything. If you don’t contribute a cent, they will still contribute a percentage of your salary for you!
It’s called “non elective,” because you don’t have to do anything to opt into this benefit. Your employer will still save in your 401k for you, no matter what you do!
I would still recommend to contribute to your 401k even if you have a non elective match. The more dollars being invested as soon as possible equals more money and options for the future.
Some companies may also combine these different types of 401k matches.
The first company I worked for out of school had a partial match, plus a non elective match. They put 3.5% of my salary into my 401k as a non elective match, and then they would match an additional 90% of every dollar up to 5% of my salary. So basically, if I put in at least 5%, I was getting an 8% (3.5% + .9 x 5%) dollar for dollar match!
It was a really good deal, and my 401k grew a lot faster because 8% of my salary was being invested in addition to my 5% contribution (13% combined).
This post may contain affiliate links, which means I get a small commission should you choose to purchase or sign up through one of my links, at no extra cost to you. I only recommend products that I personally use and believe in. You can read more about this in my disclaimer.
The True Impact of a 401k Match at Retirement
Hopefully by now you know everything about 401k matches, understand how it works, and have heard me tell you over and over that you need to be getting it.
Now you might be wondering why it’s so important to take full advantage of your employer match. After all, it’s only a few percentage points of my salary, it can’t matter THAT much in the grand scheme of things!
And that my friend, is where you’re wrong! Let’s take a look at a couple different 401k match scenarios for a $60,000 annual salary:
3% 401k Dollar for Dollar Match Example
Let’s say you get a 3% dollar for dollar match in your 401k. On a $60,000 salary, you would put in $1800 per year, or $69.23 per paycheck if you’re paid biweekly.
Each paycheck, your employer will put in an additional $69.32, making a total biweekly contribution of $138.46.
Using a handy-dandy retirement calculator and assuming 3% salary growth for 30 years, your 401k balance would grow to over $573,000!
WIthout the 401k match? Your account balance would only grow to $286,000.
If you had waited just 2 years to start contributing to your 401k, you’d only have $475,000 at the same time! Those 2 years of your contributions + your employer match costed you almost $100,000 (even though you only would have contributed $3654 of your own money).
If you wait even longer, you’ll miss out on exponentially more money at retirement.
50% 401k Partial Match up to 10% of Salary Example
In the next scenario, let’s assume that your company will match 50% of your contributions up to 10% of your salary. If you put in 10%, they will put in 5% on your behalf.
You would put in $6000 per year ($230.76 per paycheck) and your employer would contribute $3000 ($115.38 per paycheck) for a total biweekly contribution of $346.14.
With the same assuptions as above ($60,000 salary and 3% annual salary growth per year), your 401k balance with this match would grow to over $1.4 million in 30 years!
WIthout the 401k match, you’d be left with just over $955,000.
In this scenario, waiting the same 2 years to start contributing to your 401k results in $1.18 million at retirement. Missing out on those first two years of contributions from you and your employer costs you almost $300,000 at retirement!
Use Your 401k Match to Increase Your Savings Rate
The reason why this scenario results in a lot more money than the first scenario is that there is more money going into the account every month (a total of 15% of your salary). In the first scenario, we only contributed 3% of our salary for our entire 30-year career (6% total if you include the employer match).
Stepping that total savings rate up from 6% to 15% results in almost $1 million dollars MORE at retirement!
This is why your savings rate is the most important thing when building wealth. Your employer match adds to your savings rate, which is why a 401k match is so powerful for your wealth building journey.
And also remember that you’ll save money in taxes if you contribute a traditional 401k! Depending on which federal tax bracket you’re in, you’ll save 10 – 37% of every dollar you put in.
And if you invest those tax savings (in say, a Roth IRA- blog post on reasons why you should invest extra money beyond your 401k match in Roth IRA linked here), you’ll be able to increase your savings rate even more!
If you can start saving 10 – 15% of your salary starting in your 20’s, combined with a 401k match, you will be in great shape! And as you progress in your career and earn more money, always remember to increase your savings rate as well, even it it’s only by a small percent.
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What If I Can’t Afford to Get My Full 401k Match?
Maybe you’ve read through this post and have decided that you want to get your full 401k match, but can’t afford to right now.
Building wealth requires creating a gap between your income and expenses. So it’s a simple math problem: you can increase your income or decrease your expenses.
Cutting back on spending is the easier of the two, at least in the short term. Here are some ways to cut back so you can afford to take full advantage of your 401k match:
- Start a budget and track your spending. Seriously (here’s a blog post on how to start budgeting). I bet you can find a couple hundred dollars of wasted spending on coffee, takeout, or subscriptions you don’t use. Badaboom, you have money to get your 401k match!
- Pay off debt. I truly believe you can pay off debt while also getting your 401k match, but if things are really tight because of monthly payments, take a few months to get rid of that credit card debt or pay off a few student loans first (debt payoff tracker linked here).
- Keep driving your paid off car instead of upgrading (because not having a car payment is a wealth hack).
- Find a roommate or two. Or five.
- Host a potluck, game night, or movie night in with friends instead of going out every weekend.
- Pick up some no/low cost hobbies instead of mindless shopping and going out.
There are so many creative ways to find enough money in your monthly budget to take advantage of your 401k match.
So don’t come at me with “I can’t afford it,” because I know you can.
That might sound harsh, but it’s true. Our financial future is our responsibility. So take pride in that and enjoy the process of building wealth.
While the rest of your friends are still working their butts off to pay for their huge houses, cars, and luxury vacations in 20 years, you will have built a large enough nest egg do pretty much do whatever you want!
And even though I’m not in my 40s or 50s yet, I know that the short term sacrifices today will be worth it.
Happy wealth building!
-Megan
This post was all about the true impact of a 401k match.
Megan is an automotive engineer, newlywed, and personal finance blogger from the midwest. She found her passion for personal finance after starting her first “real job” after graduating college. Now, she helps other young professionals become more intentional with their money in order to build wealth for financial freedom. In her free time, she loves to travel, hike, and play euchre with her family. Read more about her story here.