1 in 5 Employees Is Missing Out on Free Money

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Everyone loves free money, and most people do everything they can to get as much of it as possible. But there's one thing roughly 20% of people fail to do that could earn them tens of thousands of extra dollars over the course of your career.

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When it comes to 401(k) plans, many employees aren't doing enough. In fact, only about 60% of millennials are taking advantage of their company's 401(k) plan, according to a report by Wells Fargo, and Gen Xers and Boomers have only slightly higher participation rates of 63% and 66%, respectively.

While participation in a 401(k) is important, even more important is the free money employees can receive in the form of matching contributions.

Among employees who participate in their 401(k)s, about 21% -- or roughly 1 in 5 -- don't contribute enough to receive the full employer match, according to a study by Alight Solutions. So if your company matches up to 6% of your gross annual pay and you're only contributing 3%, that could amount to a lot of free money each year you're missing out on.

Exactly how much is "a lot," though?

Three percent may not seem like much money, so it's tempting to think that by not maxing out your employer matching contributions, you're not missing much. But that money adds up quickly.

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To see these numbers in action, let's look at a hypothetical example. Say your company matches 100% of your contributions up to 3% of your annual gross pay and that you're earning a salary of $50,000 per year. Let's also say right now you're contributing 2%, or $1,000, per year to your 401(k).

Assuming you don't make any changes to your saving or investing strategy, here's what your total 401(k) contributions will look like if you continue saving 2% and if you bump up your savings rate to 3%:

Years of Contributions Saving 2%  Total Saving 3% Total
1 $1,000 $2,000 $1,500 $3,000
10 $10,000 $20,000 $15,000 $30,000
20 $20,000 $40,000 $30,000 $60,000
30 $30,000 $60,000 $45,000 $90,000
40 $40,000 $80,000 $60,000 $120,000

Note that these calculations don't include any return on your investments -- they're simply the contributions you and your employer are making.

So although in this example you're only contributing an extra $500 each year, that relatively small number can amount to a $40,000 difference over a lifetime.

The difference is even more pronounced if your company offers a better match or you're earning a higher salary. For example, if your company offers to match 100% of your contributions up to 6% of your annual pay and you're earning $80,000 per year, that's $4,800 per year in free money that is just waiting to be added to your 401(k).

How to start saving more

If you know you're not earning as much as you could be, how can you start saving more? It's best to take a gradual approach and make saving a habit.

Start by setting up automatic deposits into your 401(k). Most employers will allow you to set money from your paycheck aside before it even reaches you, which makes saving easier. If you're struggling to save, start small by setting aside 1% of your yearly income to put toward your 401(k).

Once you start earning more (or cutting back to trim your expenses), bump your savings goal up to 2%, then 3%. And when you do reach your employer match, give yourself a pat on the back and keep pushing yourself to save more. In 2017 the maximum amount you can contribute to a 401(k) is $18,000 (or $24,000 if you're 50 or older), so you can't go wrong with saving a few extra dollars here and there.

If you're fortunate enough to have an employer who matches 401(k) contributions, it's wise to take advantage of it. While a 1% difference may not seem like a lot of money, it can make all the different come retirement time. 

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