The 401(k) Match: Free Money You Might Be Leaving Behind
Your employer's 401(k) match is the closest thing to free money in personal finance. Here's exactly how much skipping it costs—and why it should always be your first priority.
The Guaranteed 50-100% Return
Most employers offer some form of matching. Common formulas:
- Dollar-for-dollar up to 3%: You contribute 3% of salary, employer adds 3%
- 50 cents on the dollar up to 6%: You contribute 6%, employer adds 3%
- 100% match up to 6%: You contribute 6%, employer doubles it
That match is an instant 50-100% return on your money. No investment in history reliably delivers that.
The Instant Math
You earn $80,000. Your employer matches 50% up to 6%.
You contribute 6% = $4,800/year
Employer adds 3% = $2,400/year
That's a 50% return before any market growth.
The Cost of Not Participating
Let's say you skip the match entirely for one year early in your career. What does that cost?
| Age Skipped | Match Missed | Value at 65 (7% growth) |
|---|---|---|
| 25 | $2,400 | $38,400 |
| 30 | $2,400 | $27,400 |
| 35 | $2,400 | $19,500 |
| 40 | $2,400 | $13,900 |
Missing one year of a $2,400 match at age 25 costs you $38,400 at retirement. Miss it for five years early in your career, and you're looking at nearly $200,000 in lost retirement wealth.
The priority order: 401(k) match comes before paying down low-interest debt, before maxing Roth IRA, before taxable investing. It's the only investment with a guaranteed 50-100% first-year return.
Understanding Vesting
Some employers don't let you keep the match immediately. Vesting schedules determine when the employer contributions become truly yours:
- Immediate vesting: The match is yours right away
- Cliff vesting: 100% vested after a set period (e.g., 3 years)
- Graded vesting: Gradual increase (e.g., 20% per year for 5 years)
If you leave before vesting, you forfeit the unvested match. But your own contributions are always 100% yours.
The "I Can't Afford It" Myth
Many people skip the match because they feel they can't afford the contribution. But consider:
- A 6% pre-tax contribution on $80,000 is $4,800/year, or $400/month
- But pre-tax means your take-home only drops by about $300/month (in the 22% bracket)
- Your employer adds $200/month for free
You're paying $300 to get $600. That's the deal of a lifetime.
Auto-Escalation: The Painless Path
Many 401(k) plans offer auto-escalation—your contribution percentage increases by 1% each year until you hit a target. This is one of the most effective ways to reach the match without feeling the pinch.
Start at 3%, auto-escalate 1% per year. By year 4, you're at 6% and capturing the full match. Most people don't even notice the gradual increase.
Beyond the Match
Once you're contributing enough to get the full match, the question becomes: contribute more to the 401(k), or fund other accounts?
Common wisdom suggests:
- 401(k) up to match (guaranteed return)
- Max HSA if eligible (triple tax advantage)
- Max Roth IRA (tax-free growth)
- Back to 401(k) up to $23,000 limit (2024)
- Taxable brokerage for anything beyond
How Talk Through Wealth Helps
See the long-term impact of your 401(k) decisions:
- Calculate the exact cost of missing your match
- Model different contribution levels over time
- Compare 401(k) vs Roth IRA vs taxable accounts
- Factor in your specific vesting schedule
- Project your retirement balance at different ages
Model Your 401(k) Strategy
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