Tuesday, August 18, 2015

Excuse me, is that your $1,300 on the table?

I know of very few retirees that couldn’t use an additional $1,300 per year. But to a certain degree, a lot of young people today are throwing away the opportunity to do just that.

Their failure to take advantage of what is essentially free money is putting them in a position where they’ll have much less during their retirement years than they would have if they just made one simple decision during their working years.

Let me explain.
A recent study by the well-respected financial firm, Financial Engines, estimated that nearly one out of four participants in 401(k) programs do not contribute enough into their program to receive the maximum employer match.

Financial Engines estimated that, by not contributing enough to receive the maximum employer match, Americans leave a staggering $24 billion on the table each and every year.

That averages out to $1,300 per person for those employees who are not taking full advantage of the employer match. As I said, I don’t know too many retirees who couldn’t use that extra cash.

Retirement plans can vary from company to company, but with a typical 401(k) retirement plan, the employer matches the employee’s contribution dollar for dollar up to a maximum percentage. Generally the maximum is 5 percent of the employee’s pay.

So if an employee earned $30,000 and he or she contributed 5 percent of their pay, their annual contribution would be $1,500. Throw in the $1,500 employer match and you’ve got $3,000.

Using this example, if the employee only contributed $1,000 over the course of a year, the employer would only match $1,000. In other words, the employee failed to collect an extra $500 of “free” money. Unfortunately, nearly 25 percent of employees are failing to participate to the max and are therefore leaving dollars on the table.

But the study didn’t stop there. It also determined that more than 40 percent of those who miss out on the match earn less than $40,000. That’s unfortunate, but understandable. Those earners likely need every possible dollar for the cost of living.

What really shocked me, however, was that 10 percent of those who don’t take full advantage of the match earn in excess of $100,000 annually. Even sadder was that the largest segment of those missing out on the match are under 30.

Why aren’t younger employees participating? Well, perhaps retirement seems like a lifetime away. Maybe they’re burdened by college loans. Or it could just be a lack of financial education.

That being said, the bottom line is the financial services industry has to do a better job helping young people understand the importance of saving early in their careers.

But families also need to discuss money issues. Families need to lay the foundation for good and prudent money management at an early age. In my experience, many are reluctant to discuss financial issues with their adult children.

Talking to adult children about money is one of the topics I’ll discuss at the Healthy, Wealthy and Wise program sponsored by the Society for Lifetime Planning this coming Tuesday. For details and reservations, call 248-952-1744.

During your working years, leaving employer-matched money on the table is a mistake. During your retirement years, not discussing money issues with family members can also lead to poor money decisions by your children, even into adulthood.

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