Don't Let Excuses Take You Off Your Road to Retirement
Although investing for your retirement is probably the single most talked about personal finance topic, many people still do not invest for retirement and many more don't max out their 401(k) at work. Even if you can't afford to max out your contributions, you should max out the match that your employer gives.
The Power of the Employer Match
The employer match is the amount of extra money that your employer will give you for contributing to your 401(k) – meaning for every dollar you put into your 401(k), your employer will match that dollar and contribute extra money. This is effectively free money!
An Example
Scenario: You make $50,000 a year and your employer will match up to 5% of your salary. This means you can contribute $2,500 dollars (5% of your salary) to your 401(k) and your employer will deposit another $2,500 into your 401(k). By investing $2,500 in your 401(k), your balance jumps up by $5,000. You get an immediate 100% return on your investment.
The Excuses People Give for Bad Decisions
When you think about it, it's amazing that anyone wouldn't want to get this free money. Especially since your employer is effectively giving you a 5% raise. But the truth is, many people don't take advantage of this easy-to-get free money. Below are some of the most common excuses people give for not investing in their 401(k). Even sadder, many of these excuses often appear in personal finance articles as "valid" reasons why people may not contribute to their 401(k). None of them except the last one are truly valid reasons.
As you look at the excuses people give below, realize most of them are invalidated by one simple fact: when you contribute to your 401(k) with an employer match, you are getting an instantaneous 100% return on your investment. Additionally, because your money doubles, any future return also doubles. So if you normally would have earned 6% on your investments, because your employer doubled your money, you are actually earning a 12% rate of return on the money that you put in.
I Don't Have Enough Money
Probably the most common excuse people give for not contributing to their 401(k) is that they can't afford it. They look at their expenses and their income and can't seem to find a way to fit one extra expense into their budget. But viewing your 401(k) contribution as an expense is the wrong way to look at it. When you contribute to your 401(k), you’re actually not spending. You are taking some of your money and putting it into a specific account – which is still your money.
Let's think through the logic of “I don’t have enough money.” Your company just offered to give you an extra $2,500 (sticking with our example) and you're saying that you don't have enough money to get extra free money; the reason you don’t want money is because you don’t have money. If I walked up to you on the street and tried handing you a $10 bill, would you tell me “oh, I don't have enough money to take your money?”
If you're having trouble freeing up the money in your budget to contribute to your 401(k), there are simple things you can do to save money without significantly impacting your lifestyle. Find a way to contribute – it’s worth it.
I'm Still Paying Off Debt
Another interesting excuse for not contributing to your retirement is debt. Some financial gurus even advocate for people to postpone retirement investing until after all consumer debt has been paid off. A case could be made for postponing additional retirement investments until your debts are paid off, but there is no excuse for not taking advantage of the 401(k) match.
Again, let's think the logic through of not taking free money from your employer in order to pay down debt quicker. By paying extra money toward a 4% car loan, you're missing a 100% guaranteed return on your retirement investment. That math just doesn't work out in your favor.
In our example: by using $2,500 to pay down your car loan instead of investing into your 401(k), you are saving only $100 in annual interest expense at the cost of losing $2,500 in free money from your employer. Even if you have high interest rate credit card debt, your employer match is still a better deal. Until the interest rate on your debt approaches the 100% employer match, the math works in favor of 401 (k) investing.
Debt payoff plans can still be highly successful even while investing for your long-term future. You don’t have to choose between paying off debt and investing for retirement.
I'm Saving for a House or Another Major Goal
Again, the 100% instant return on your investment with the 401(k) match is going to pale any other savings or investment option you have. Saving for a larger down payment for a house is definitely worthwhile, as is investing for your children's education. But your retirement investing should be your top priority, especially when your company is going to double your investment.
No matter what the other goal is, you will have more flexibility in achieving that goal than you will in achieving a comfortable retirement. You can put a smaller down payment on a house, and your children can get student loans, but there is no such thing as a retirement loan. And every year you postpone retirement investing today, is another year or more you will have to postpone your actual retirement in the future.
I Don't Like the High Fees in My 401(k) Plan
The high fees found in some 401(k) plans are definitely a disadvantage of investing in a 401(k), including administration fees and higher fee mutual funds. No matter how high the fees are, it is doubtful they are going to overtake the 100% return you get from your employer match. A better solution is to invest in your 401 (k) only up to the employer contribution amount, and then invest the remainder in a lower fee IRA. Don't give up a 100% return on your money because you don't want to pay an extra half percent fee.
I Fear Future Tax Increases or I Don't Expect My Taxes to Fall in Retirement.
This is probably the most rational fear that anyone has associated with the 401(k). Chances are, taxes will not be the same when you retire. At the same time, your taxes probably won't increase so much they negate the free employer match money.
Again, the instant 100% return on your money will negate any tax costs associated with your investing. Additionally if you have the opportunity to split your retirement investments between a tax-deductible 401(k) and a Roth IRA you can have the best of both worlds – getting the free employer match now and having another pool of money you can withdraw tax-free in retirement.
I Have No Emergency Fund
This is another rational concern that often leads people to an irrational decision. It is definitely a huge financial risk to not have an emergency fund, and building one should be a top priority. But that priority should not come at the expense your retirement.
Find other ways to accommodate both a savings regime to build an emergency fund and obtain the employer match for your retirement. As you build both, you may worry that your emergency fund isn’t as big as you’d like. Consistent contributions to both, however, will be the key to accomplishing both goals.
If you absolutely need to, you can take money from your 401(k) for critical emergencies. Just make sure to identify what is a real emergency. It’s acceptable to raid your 401 (k) to pay for life-saving medical treatments, but not to avoid moving to a cheaper apartment if you lose your job.
Your 401(k) should be one of the biggest sacred cows in your financial plan. Avoid touching your retirement except for rare occasions like life-threatening emergencies or retirement.
I Might be in a Higher Tax Bracket if I Save Too Much for Retirement
This is the most humorous of the reasons people give for not investing in the 401(k). If you are concerned investing too much in your 401(k) will jump you into a higher tax bracket in retirement, then your concern is that you are worried you’ll be too rich and too comfortable in retirement.
For those of you overly concerned with paying taxes, the most effective way to avoid paying taxes in retirement is to be poor and homeless. Ideally you want to be paying a very large tax bill in retirement because it means you have a very large income from your investments to enjoy.
Having this concern probably means you have sufficient assets and income that you should hire a financial planner to help you make the best decisions. And a good financial planner can provide you with plenty of other strategies to avoid or manage taxes in retirement.
I Have Poor Investment Options in My 401(k)
Unfortunately, for many this is true. 401(k) plans are notorious for having high fees and limited investment options. Although many 401(k) programs are improving the options they provide, you likely will have limited and potentially subpar investment options when investing in your 401(k). This should not stop you from getting the employer match. The 100% return on your investment will still beat anything else you can get in the market. And you may have the opportunity to invest partially in your 401(k) and in an IRA, which gives you access to all available investment options.
My Employer Only Matches 50% of My Contributions After a Certain Dollar Amount.
Some 401(k) plans have a multi-level matching scheme, where they match 100% of your contributions up to a certain amount and then match 50% for the next pool of money. As an example, matching 100% up to 3% and 50% up to 5%.
Assume you have a $50,000 annual salary and you contribute the full 5% ($2,500) into your 401 (k). In this scenario, your employer would match 100% of the first $1,500 (3%) and then would only match 50% of the next $1,000 (2%). The result is your employer would deposit an additional $2,000 into your 401 (k).
Some financial gurus argue you should invest up to the 100% match, but stop investing when the match drops to 50%. In our example, you’d invest $1,500 and not a penny more. The gurus’ logic being that your return on your investment drops by 50% once you hit that first threshold. This is ridiculous logic. The only thing you should care about is what the return on your investment is – 50% is still an amazing return.
Yes, the second pool of money did not earn you as high a rate of return is the first pool of money, but it is still earning you a 50% instant return on your investment. That 50% instant, guaranteed return is going to destroy anything you could get in the stock market or any consumer debt costs you’re likely to have. As long as your employer is offering you free money, you would be foolish not to reach your hand out and grab it.
My Employer Doesn't Offer Me Free Money.
This is the only legitimate reason why you should not invest in a 401(k) plan. If your employer does not offer you a match, then there is no incentive to invest in their plan. This does not mean you shouldn’t be investing for your retirement. Even without an employer match, investing for your retirement is still one of the most intelligent personal finance decisions you can make.
If your company doesn’t have a 401 (k) plan, you can take control of your investing through an IRA. Find a broker, a discount online broker, or a financial advisor and open an individual retirement account. You do not need your employer’s help to take control of your retirement investing and secure your long-term future.
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