According to Plan Sponsor Council of America, 11.5% of small companies suspended or reduced their employer match in 2020. That’s just another bad milestone for a year that brought a pandemic, social unrest, and massive unemployment.
But as the year comes to a close, there’s some good news. A new survey by global-advisory firm Willis Towers Watson concludes that most employers that cut their matching contributions in the COVID-19 era are planning to reinstate them in 2021.
Any changes to your employer match should signal you to run some numbers and find out how those changes affect your savings plan. An increasing employer match might allow you to shoot for more aggressive savings goals.
But if your employer match is decreasing, you’ll have to lower your savings target or raise your own contributions to cover the shortfall. Putting a value on your employer match is also incredibly motivating — you’re less likely to skimp on your own contributions if you know it could mean an extra $100,000 in your retirement account when you retire.
Read on for three easy steps to quantify the cumulative value of those employer-funded deposits.
1. Check your matching rules
As a starting point, locate your plan’s matching rules or ask your plan administrator to send them to you. If your employer match has been paused, there’s no guarantee the rules will remain the same when the match is reinstated. The Willis Towers Watson survey found that 60% intended to reinstate the match at its previous level. Hopefully, your employer falls into that group.
If you can’t locate your matching rules, plan for 3% if you work for a smaller company or 5% if you work for a larger company. The average employer match rate, according to Fidelity, is 4.7%.
2. Estimate the annual employer contribution in dollars
Next, multiply the employer match rate by your annual salary. If you make $55,000, a 3% match equates to $1,650 in annual contributions or $137.50 in monthly contributions.
3. Project the investment growth
For this next step, you’ll need an investment calculator. The SEC has a reliable one that’s easy to use. You’ll input the monthly contribution amount of $137.50, the number of years you plan to save, and your estimated interest rate. For the years you plan to save, use the number of years between now and your planned retirement date. That way, you’ll see how much those matching contributions will be worth when you retire.
The estimated interest rate is a tougher nut to crack. This should be based on how your retirement account is invested. But it’s usually not appropriate to use the actual growth rate in your account over the last couple of years because a two-year time frame isn’t representative of long-term growth — and that’s true whether the market’s been up or down.
The past two years have been unusually profitable for stock market investors. The S&P 500, an index that’s considered a benchmark for the entire market, grew nearly 29% in 2019 and about 14% so far in 2020. Those high growth rates aren’t sustainable long term.
If you’re mostly invested in stocks, you could use the market’s long-term average rate of 7%, which is adjusted for inflation. If you have a more conservative portfolio because you’re closer to retirement, you should use a lower interest rate, say 5% or 6%.
As the calculator will tell you, $137.50 in monthly-match contributions invested at 7% for 25 years grows to more than $100,000 — a sizable sum. When your timeline is shorter, the ending balance is somewhat less impressive. Invested at 5% for five years, those same contributions grow to about $9,000. It’s not six figures, but it’s still free money.
Commit to maxing out your employer match
That huge range in value, from $9,000 to $100,000, speaks to three practical lessons about saving for retirement. One, don’t overlook that employer match. Whether you have five years to save or 25, it still adds up.
Two, don’t waste any time saving. You can create far more wealth in 25 years than you can in 10 or 15. And three, increasing your total monthly contribution by a few hundred dollars can add thousands to your retirement balance over time. That’s true whether the increase comes from your own contributions or your employer match.
Hopefully, your employer reinstates or raises your match in 2021. It’s definitely easier to amass a large retirement balance with a match — though it’s possible to do it on your own, too. If the match outlook looks bleak, find a way to raise your own contributions. As the numbers above show, even one or two hundred dollars a month will help.