Auto-Enrolled in a 401(k)? Check the Default Rate Against the Match
Many new US 401(k) plans now enrol workers automatically. That is a good nudge, but the default contribution rate is often low, commonly around 3% of pay, and it may not be enough to collect the full employer match.
How a match formula works
A common formula is “50% of what you contribute, up to 6% of salary.” On a $60,000 salary:
- You contribute 3% ($1,800). Employer adds 50% of that: $900.
- You contribute 6% ($3,600). Employer adds $1,800.
Staying at the 3% default leaves $900 a year of match unclaimed in this example. Over 30 years at a 6% return, $900 a year grows to roughly $71,000.
What to check on day one
- The match formula in the plan summary (for example 100% up to 4%, or 50% up to 6%).
- The default rate and auto-escalation. Some plans raise it 1% a year; that can take years to reach the full-match rate.
- The vesting schedule. Employer money may vest over several years, which matters if you might change jobs.
- The default investment, usually a target-date fund. Check its fee.
If cash is tight
Contributing at least enough for the full match is usually the highest-return step available, but not at the cost of missing rent or carrying high-interest card debt. Raising the rate by 1% with each raise is a painless way to get there.
Free tools
- 401(k) match calculator: https://smartbudgetsheets.surge.sh/calculators/401k-match-calculator/?utm_source=nostr
- Roth vs traditional calculator: https://smartbudgetsheets.surge.sh/calculators/roth-vs-traditional-calculator/?utm_source=nostr
- Retirement savings calculator: https://smartbudgetsheets.surge.sh/calculators/retirement-savings-calculator/?utm_source=nostr
- Debt Payoff Planner, up to 8 debts (Payhip): https://payhip.com/b/PtBLU?utm_source=nostr
- 42 free budget templates, pay what you want ($0 is fine): https://smartbudgetsheet.gumroad.com/l/ngpkrb?utm_source=nostr
General information, not financial advice. Figures are rounded examples.
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