There’s no free lunch (except in retirement plans)

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We’ve all heard the saying, “There ain’t no such thing as a free lunch.”  It’s used to remind us that there is a cost to everything even, or especially, if it is hidden from view.  The phrase actually comes from the once-common practice of saloon owners advertising a “free lunch” for patrons who would purchase a drink at their establishment.  Of course, the fare offered at these banquets was heavily salted to induce patrons to imbibe more of the money-making beverages.   Social critics at the time were keen to point out the hidden costs of this “free lunch.”  The average price of drinks where a free lunch was offered were higher than at other establishments.  Less obvious, but just as consequential, were the societal costs associated with higher rates of alcohol consumption.  And so, as an admonition against thinking that you can get something for nothing, the phrase, “there ain’t no such thing as a free lunch” entered the American lexicon.  The phrase achieved its current popularity when the free-market economist, Milton Friedman, used it as the title of a book in 1975.

For sure, nothing comes for free.   But when we’re talking about saving for retirement there is something that comes as close to a “free lunch” as you can get, and that is the employer match in your 401(k), 403b or other employer sponsored retirement account.  As employers have moved away from providing a life-long pension to retired employees, they have stepped up with a commitment to help their employees contribute to their own retirement accounts and the “Employer Match” was born.  The Federal government supports employers by making the “match” tax deductible.

As of 2016, 66 percent of workers had access to an employer sponsored retirement plan, yet only 49 percent of workers participate in the plans available to them.  And worse, of those taking advantage of the employer match about one in four is not getting the full match because they are not saving enough – leaving an average of $1,336 on the table each year, or an estimated $24 billion altogether.

Most employers will match from three to six percent of their employee’s contribution – meaning that if a worker contributes 3 percent of their salary to the 401(k) then the employer will match that dollar for dollar.  Sometimes an employer will match 50% of the contribution, meaning that if a worker contributes 8 percent of their salary, the employer will put in 4 percent of the worker’s salary as a match.

Of course, you should always contribute to your employer retirement plan enough to get the full match, not doing so is to pass up a “free lunch” for yourself.  But, just the same, you should never assume that getting the full employer match will be enough to provide you with a comfortable and secure retirement.  Statistics show that a worker in her thirties should be saving between 12 and 18 percent of her salary in order to have enough money to retire securely.  If you are in your forties, and haven’t been saving at least 12 percent consistently, you may need to set aside up to 22 percent of your salary, or, plan on working into your seventies.

In addition to saving money in your accounts, you should be intentional in the way you invest it.

We will address strategies to maximize the money you have saved in your retirement accounts in our next post. Meanwhile, if you have any questions regarding your employer sponsored retirement accounts, please feel free to contact us directly. We would be happy to offer a complimentary evaluation of your accounts, and work with you to develop a plan to ensure you’re getting the most from the money you’ve earned.