Maximizing Employer Contributions

Saving for retirement is a long-term process. It takes time to build up your funds paired with a strategy to maximize all opportunities available to you.

One possible opportunity available to many is the employer contribution.

Many employer-sponsored retirement plans, like Pension Fund’s Tax-Deferred Retirement Account (TDRA), have a feature where, as long as you’re contributing, your employer may contribute as well up to a fixed limit. These contributions are essentially free money, so this is an opportunity you don’t want to miss!

Employer contributions are usually set up to match the employee’s own contribution to their retirement. For example, a formula could be a dollar for a dollar, up to a certain percentage. That means the employee is receiving a 100% return on the matched dollars contributed. Another formula could be a dollar for a dollar up to a certain percentage, and then fifty cents for each additional dollar contributed, up to a certain limit.

There are many different ways for the employer match to be calculated so it’s important to understand how your employer match works, so you can maximize it. The average matching contribution in the United States is around 4%, but there are many different ways for the employer to get there. Your Money Line will be happy to help explain how your specific matching program works.

The 2021 employee contribution limit for employer-sponsored retirement plans like the 401(k), 403(b), and for most 457(b)s, is $19,500 each. Are you at least 50 years old? Good news! You’re able to contribute an additional $6,500 annually to help “catch up” to where you should be. If you’re lucky enough to have both a 403(b) and a 457(b), you can contribute this amount to both types of accounts.

With the discussion of matching and limits out of the way, let’s talk strategy!

The first step in maximizing your employer contribution is to figure out what their formula is. For example, if it’s a dollar for a dollar match up to 4%, multiply your annual gross salary by 4% to arrive at the maximum annual employer contribution. In this scenario, if you make $50,000 a year, your maximum employer contribution would be $2,000. This means that if you contribute $2,000 over the course of the year, the total contribution to your retirement account will be $4000. Divide $2000 by the number of pay periods per year to arrive at your minimum contribution needed to get your maximum match.

If you can’t afford the contribution amount to get the full match, start with what you can afford and build it up slowly. Here are some suggestions on how to build up your employee contribution:

• Increase your contribution by 1% every three, six, or 12 months if your plan allows. (Set a reminder on your phone to chime to remind you!) You’ll need to find a margin in your budget to account for the reduction in your take-home pay. You can find tips on how to do that here.
• When you receive a pay increase, adjust your contribution so that you’re unable to see the increase in your take-home pay. This will ensure you don’t absorb the new income into your spending.
• If you receive a year-end bonus, you may be able to have retirement contributions taken out if it’s set up ahead of time. You’ll want to check with HR to see if this is an option.
• Your plan may have a provision for automatic annual increases. Some plans will automatically increase your contribution level 1% each year.

Though increasing your contribution is important to get the employer match, it’s equally important to make sure you’re saving enough for retirement, overall. As a rule of thumb, saving about 12% to 14% of your annual income throughout one’s career will set you up for a comfortable retirement. However, if you haven’t been saving that much already, you’ll need to plan to save more. Saving early and saving consistently will help ensure that your retirement funds grow to meet your needs in the future.

A friendly word of caution: Be sure that you don’t go over the annual contribution limit of $19,500 or $26,000. The IRS does take this seriously and it can be a bit of a pain to undo.

It’s important to be sure you’re taking advantage of all opportunities available to you while saving towards your retirement goal. Your Money Line is here to help make this easier for you by answering any questions you have about retirement funds and savings. You can call us between the hours of 9 a.m. - 9 p.m. EST Monday through Friday at 833.890.4077, send us an email at answers@yourmoneyline.com, or schedule a call with us by clicking here.