The #1 Most Expensive 401(k) Retirement Planning Mistake In 2022

Retirement

What do you think is the biggest 401(k) retirement planning mistake? You might think it is picking the wrong investments, setting up the plan improperly, or contributing the wrong amount. The answer is simpler than the 401(k) mistakes I just listed. The biggest 401(k) mistake in 2022 is missing out on your 401(k)-employer match. This is free money many people are just ignoring.

Would you be more likely to take the easy step to get your full employer 401(k) match if you knew how much those contributions would grow by the time you are ready to retire? I would hope you would be more motivated to get the full employer match you are entitled to if you realize that skipping it could be a million-dollar retirement planning mistake. (For some of you, the number will be higher; for others, lower). To put it more plainly, not maximizing your employer match could cost millions of dollars over the course of your working lifetime and typical retirement.

Nearly one in five workers are making this costly retirement planning mistake. Those who fail to get their full employer match will significantly increase their chances of falling into poverty in retirement. Over time, missing out on free money in your 401(k) can drastically reduce your income in retirement. This is why missing the full employer match is people’s biggest mistake in their 401(k) retirement plans.

How much is my 401(k) employer match worth?

On average, employees leave $1,336 in 401(k) matching funds on the table each year by not saving enough into their retirement accounts. This is according to a 2015 study by Financial Engines. The more you make, the more 401(k) match you could be missing out on. Keep in mind the average income in 2022 is around $53,500. If you are reading this post, I’m guessing you make more than that.

You may think this is no big deal; how much would this really change your retirement? How much could that really add up to? A mistake would be to believe that number would add up to $60,000 ($1,336 multiplied by 45 years of work). This retirement planning mistake is much more costly than $60,000.

Cost of Skipping Full 401(k) Match Over Your Career

Leaving $1,336 of a company match on the table over your working career from 25 to 70 would total more than $60,000 in lost money from your employer. You also missed out on contributing $60,000 pre-tax to your 401(k). You would also pay more state taxes and federal income taxes over your working years by skipping 401(k) contributions. But these numbers pale in comparison to what you are giving up in retirement income and security. If invested wisely, that money would grow exponentially over time.

For example, putting that $1,336 into your 401(k) each year, from 25 to 70, and assuming an average return of 10% per year, how much do you think you would have at retirement? The $1,336 per year, with an average return of 10%, would grow to more than $960,000 by the time you were 70. That number alone exceeds the average person’s savings for retirement. But wait, it gets better; you would have been contributing $1,336, which would have doubled your 401(k) balance to around $1,920,000 at age 70.

How much income does $1,920,000 translate into retirement income?

Using the four-percent rule for the sake of simplicity, how much income would $1,920,000 mean for your retirement? The four-percent rule basically means withdrawing four percent from your retirement account each year. In this case, you could take out $76,800 annually in retirement. This is more than the average person makes today. Throw in Social Security, and many people who followed this example could see their standard of living increase in retirement.

Yes, you read that right; just giving up the average employer match over your working life could cost you $76,800 per year in retirement income. To throw some salt in this painful wound, you would also be paying more taxes than necessary over your working life.

Other retirement income strategies could make skipping the employer match look even worse. The bigger the retirement income, the bigger the mistake of skipping the employer match. Either way, I think we can agree having more money via a higher retirement income is better than having less retirement income.

Related: What You Need Know About A ROTH IRA Today

Start Investing Today for Retirement

I opened my first retirement account right after college, contributing a whopping $25 per month. I, of course, have dramatically increased my 401(k) contributions over time. The critical takeaway from this article is to get started investing for retirement. Whatever your financial situation, it’s important to start saving whatever you can, and no amount is too small. Soon that $25 per month will grow to $100 and beyond. You may even get that employer match and double your money right off the bat.

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