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Give yourself something now: a 401(k) boost

Updated: May 3, 2013 12:14PM

Originally published: December 19, 2005

You’ve spent the past few weeks thinking about holiday gifts for those you love. Now spend a few minutes thinking about a present for yourself. Make it a gift that keeps giving.

This is the perfect week to contact your company human resources department, and boost your 40l(k) contributions to the maximum possible out of your last paycheck of the year.

Sure, you’ll miss that money in January when the bills for all your shopping come due. But in 10 or 20 years, you’ll realize that this was the best gift you received or gave.

Just look at what happens when you contribute to your company retirement plan -- at least enough to get the matching dollars from your boss.

In the typical retirement plan, the company matches employees’ contributions about 50 cents on the dollar, up to 3 percent of the employee’s salary.

(If your company is more generous, with a higher percentage match, remember to thank your boss. If your company doesn’t offer a matching contribution, ask why not.)

50 percent appreciation

That “free” money from your employer is the equivalent of buying a stock that goes up 50 percent overnight. Put in those terms, it’s hard to imagine anyone not contributing at least this basic amount to the company plan.

Yet in many large companies as many as 25 percent of employees don’t contribute a penny to the 40l(k) or 403 (b) plan.

Here’s what they’re missing. Let’s make a few assumptions. Take Susan, an employee who earns $75,000 a year, and contributes just 3 percent of her salary -- enough to get the match. And let’s assume a reasonable 8.5-to-9 percent average annual return on the well-diversified investments in the plan.

All the following numbers are calculated by FinancialEngines, using their Monte Carlo modeling scenarios that factor in appropriate expected investment returns and an adjustment for inflation.

The results are in today’s dollars, just so you can see a realistic view of your future purchasing power.

Susan’s contribution of 3 percent of her salary amounts to an annual contribution of $2,250 each year.

If there were no match, the retirement account would grow to $26,100 in 10 years, and $63,100 in 20 years.

But with Susan’s company matching 50 cents on the dollar, Susan’s account would grow to $39,000 in 10 years, and $94,600 in 20 years, in today’s dollars.

In 2006, you can contribute a maximum of $15,000 to your 40l(k) or 403(b) plan.

So let’s see what happens if Susan contributes the maximum $15,000 over the next 10- and 20-year periods, along with the matching contribution of 50 cents on the dollar for the first 3 percent of salary contributed.

Then, Susan would have $213,000 in 10 years, and $582,000 in 20 years, again adjusted for inflation, and in today’s dollars.

That’s a very real possibility -- but you have to start now to get there!

You’re never too young and you never have too little money to get started on your retirement investing.

Typically, twentysomethings ignore the pleas of the HR department to contribute to retirement plans. They’re still paying down student loans and have more pressing immediate needs.

But if a 25-year-old worker, earning just $30,000, did contribute 3 percent of salary, $900, and got a 50 cent match, and earned about 8.75 percent, and did so for the next 40 years, her account would be worth $115,000 at age 65, in today’s dollars.

And that’s without even considering that someone this smart would certainly get pay raises and increase her contributions dramatically along the way.

Free 401(k) advice

To figure out if you’re on track, you can get a free, one-year subscription to, the personalized service for 401(k) investment advice that’s offered to more than 5 million employees and nearly 70 Fortune 500 companies.

There’s no access for individuals, except if you click the blue button on the home page of You’ll be taken to for your free trial. It’s worth it -- and that’s The Savage Truth.

Terry Savage is a registered investment adviser and the author of the newly published The Savage Number: How Much Money Do You Need to Retire? (256 pages, Wiley, $24.95). Distributed by Creators Syndicate.

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