Sometimes in personal finance – as in the rest of life – you get false clues, things that seem important but lead you astray. Here’s how you can spot a false clue and ignore it. Let’s assume you are already participating in your employer’s retirement plan or are about to start. You have to decide how much to contribute and how to invest within the plan. Many employers offer a matching contribution, and employees typically calculate how much to put in to get the maximum match. Seems like a good idea, but it’s a bad idea to limit yourself. Let’s say your employer matches your contribution dollar-for-dollar up to 4% of your salary. Sounds like a good deal, and it is. You put in 4% and get 4% – double your money if you don’t earn a dime on investments. What’s bad about that? It’s bad if you just stop at the 4%. You will fail to get a tax deduction today for dollars contributed, and fail to get the benefit of years of tax-deferred growth on the much larger pile of cash that will accrue to you from putting in more. And let’s face it – if you’re reading this I’ll bet your goal is that larger pile of cash.
But isn’t a 401(k)/403(b)/457 only good if there is an employer match? Nonsense. Some advisors say that with no match you should do other things with your money; paying down debt, for example. I disagree. By all means eliminate debt, but always keep a sense of perspective: building savings (such as a 401(k)) and reducing debt are equally important. You should work both angles: contribute what you can spare each month to your retirement plan and pay down debt ahead of schedule.
Remember – building a sizeable retirement account is about securing your future. It’s not about whether there is a matching contribution or how much it is. Ignore the match and put in all you can.