“If you’re not contributing up to the five percent match, you’re leaving money on the table!”
Note. Like my Net Worth piece, the subject matter of this blog post is not new. It has been known for years by those who’ve learned about it in their families, learned about its concepts in business school, or have discovered it on their own. It’s a discussion from my personal perspective which I think is worth visiting. Also, while this is a ‘money’ topic, I’m discussing it from a ‘scholarly’ perspective. I’m not rendering financial advice where I’m telling readers what they should do. In the spirit of the first principle of my blog, Creating Ecosystems of Success, I’m simply introducing a concept and discussing why it’s important for the lay person, so they can make their own life choices.
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At the beginning of this week, a mentor emailed me telling me that April is “Financial Literacy Month”. He asked me if I was writing anything on this subject. I shared with him that I already had something coming out of the pipeline regarding a topic we’d coincidentally discussed at length. He also shared an article with me entitled, There is a savings crisis and many Americans don’t know how to fix it. Here’s how. It serves as the perfect jumping off point for my financial offering for the month of April 2019.
I saw many retirement commercials during my young adult life. They were usually run during sporting events. I wasn’t thinking about my older years at the time, which seemed too far away to imagine. The commercials I remember the most are those by Dean Witter where, in the black and white film, he states, “We measure success one investor at a time!”
My next thoughts of saving for retirement came courtesy of Robert T. Kiyosaki, author of Rich Dad Poor Dad. I believe it was in his book, Conspiracy of the Rich. In the book he described the “Employee Retirement Income Security Act” (ERISA) enacted by President Richard Nixon. The new law made employees responsible for their own retirement savings, converting most everyone over from ‘Defined Benefit’ (DB) plans (pensions), to ‘Defined Contribution’ (DC) plans. That was during my postdoctoral fellowship and I think I set up a ‘Roth IRA’ at my bank, shortly after reading the book.
It wasn’t until I started working in the federal government that I seriously started thinking about retirement, but it wasn’t due to my own volition. It was due to a friend I was dating at the time. I’ll facetiously say that the relationship didn’t last, but her asking me about whether I started saving in my government “Thrift Savings Plan” (TSP) was a major contribution on her part. She caused me to think about retirement in the relationship context.
I realized that I might be a liability as a partner if I didn’t have my own retirement ‘nest egg’ which in some respects is true. (See my Mother’s Day 2017 blog post to get a feel for the potential dangers of two people settling down when only one has savings and the other one doesn’t.) In terms of relationships, are money and resources everything? No, but they count for a lot and are worth pondering and discussing ahead of time!
At this point I’m going to transition and point out that in the financial world, there are different rules for different people. I first learned this after reading the above-mentioned Robert Kiyosaki’s second book, Cash Flow Quadrant, which discussed the differences between: Employees, Self-Employed Individuals, Business Owners, and finally, Investors. To make a long story short, in addition to having their own unique ‘tax laws’, employees by nature have a ‘working life’, and they must figure out how they’re going to survive once their working life is over. That’s if they’ve thought about it.
Some of my relatives are beneficiaries of the DB plans described above, but they’re “Baby Boomers”. My father is a retired educator who started teaching in the late 1980s. My uncle, a retired firefighter, started his career around that time as well. I could be wrong, but I think that most municipal workers such as the police officers and firefighters receive Defined Benefit pensions. Most teachers now must contribute to a Defined Contribution plan. If I’m wrong, please leave a comment below. What if you’re responsible for your own retirement savings? Read on.
“If you’re not saving the maximum amount so that you’re getting the government’s five percent ‘Matching Contribution’, you’re leaving money on the table!” The first person to point this out to me was a counselor at work who was helping me with relationship issues with the above-mentioned lady friend. By the way, this anonymous friend inspired me to write my piece entitled, The difference between being Cheap and Frugal, so she deserves a lot of credit in terms of inspiring some of my content.
I’d told the counselor that she’d called me ‘cheap’ on multiple occasions, a label which hurt me at the time. One of his immediate questions was about whether I was saving into my retirement account to get my government match. When I told him that I was saving less than the five percent, he responded that I wasn’t taking full advantage of what the government was offering me. Also getting the match should’ve been first and foremost in my mind.
So, what is a Matching Contribution and why is it important? I’m glad you asked. A Matching Contribution is a dollar amount that your employer matches in relation to what you’re saving in your retirement account. For the federal government, it’s five percent, and it differs from employer to employer. Some don’t match at all. The point is that if you’re not contributing anything, you’re not going to get anything, or maybe the bare minimum. If your employer matches what you’re put in, you’re effectively getting free money.
Your employer match makes it easier to get to the holy annual retirement threshold of 15% and beyond. If you’re consistently saving five percent, and your employer is matching that with their five percent, you’re already at ten percent for the year. At that point you must come up with another five percent or more to get to 15%. If you don’t know where you’ll get that extra five percent, look at your personal budget. I wrote a piece on that recently.
If your employer doesn’t match your contribution, should you still save for your retirement? Absolutely. First, if you’re going to work until your 60 years old or more, you do want something for yourself, or else you’ll have to keep working, or someone will have to take care of you.
Second, from experience, your retirement savings contributes to your ‘Net Worth’ and this translates into other areas such as qualifying for mortgages. Most lenders want to see that you can save money and something they consider qualifying you for a mortgage is your Net Worth – the difference between your assets and liabilities. I wrote a piece on that as well.
When refinancing my mortgage two years ago, I realized that that my lender actually had a form entitled, ‘Net Worth’. Calculating it quarterly was routine for me by then. I’d already built up an ‘Emergency Fund’ and I’d started methodically saving into my retirement account, so I knew I was in good shape. This was in stark contrast to when I barely qualified for my first mortgage due to being too ‘overleveraged’ (carrying too much debt) ten years earlier. See my post on Dave Ramsey’s ‘Debt Snowball’, to see how I dug out of my own debt-hole.
Speaking of debt, as an employee living off one paycheck, budgeting, controlling costs, and minimizing debt are all keys to being able to build a retirement nest egg. You want to be able to create enough ‘Cash Flow’ so that you don’t miss the amount going into your retirement account every pay period. Furthermore, you don’t want to be in position to have to raid or borrow against your retirement savings should an emergency arise – both of which could hurt you.
Speaking of Dave Ramsey’s group, a good book to read is Retire Inspired by Chris Hogan. It gives a nice discussion about what retirement is and why it’s important, which brings me to my closing point. If we all know we’re going to age, why doesn’t everyone save for their retirement? I think the answer is a lack of awareness and a lack of understanding of why it’s important.
“You should’ve learned about this when you were 18 years old!” My mentor scowled at me after we finished talking about my retirement savings and why I hadn’t maximized it a couple of years ago. It stung for a moment, but I laughed about it inside afterwards. It would’ve been nice to have been educated on the subject 20 years earlier, but honestly those in my ecosystem back in Buffalo just weren’t talking about investments or retirement savings.
One could argue that the change from DB-pension plans and DC plans needs to be better explained in the school system so that all kids get exposure to these concepts early. I do agree with that, but the reality is that if these things aren’t discussed in your family circle, you must figure them out on your own somehow.
I don’t want to make this racial, but over the years I’ve heard stories of Jewish families regularly and openly talking about money and investments at family gatherings. It’s not race-specific as my mentor’s family which is black, regularly engages in these types of discussions. What does your family talk about at gatherings?
The financial world has a language all its own. When you’re entering your first job fresh out of school, being told to start your retirement benefits and then hearing all the esoteric terms can literally sound like ‘gibberish’. It can be daunting like talking to your surgeon or your auto mechanic. Unless you understand why it’s important to start saving for your later years, you’ll likely neglect it and use your precious resources on other things, but hopefully not for too long, as it’s difficult to catch up beyond a certain age.
Why is it hard to catch up? This brings us to the “Law of Compounding Interest” of which time is a major component. I wrote a piece on that as well which I’m sure you’d enjoy, but the quick version is that the earlier you start your retirement savings, the more time they have to grow and multiply. Furthermore, depending on the nature of your plan, you could be missing out on significant annual tax savings which add up over the years.
The last important piece is figuring out what your retirement savings should be ‘allocated’ in. This is a completely different but related subject. The point is though, that you must have something to allocate first and foremost.
Thank you for taking the time to read this post. If you enjoyed it, you might also enjoy:
• A look at the Law of Compounding Interest and why you should care
• Your Net Worth, your Gross Salary, and what they mean
• The power in budgeting your money
• I still don’t have a car in 2018: A story about playing financial chess
• We should’ve bought Facebook and Bitcoin stock: An investing story
• My personal experience with Dave Ramsey’s Debt Snowball revisited
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