Many of us who are employees of a business receive a matching contribution to our retirement plan that ends up being equal to around 3% of our pay. However, there are some people who are fortunate enough to have their employers contribute a much larger percentage of their income to their retirement account without the employee having to contribute anything. If you receive a large contribution to your retirement account without having to contribute anything yourself, should you still save your own money for retirement?
I’ve seen a handful of retirement plans where the employer contributes 10% – 15% of an employee’s pay to their retirement account without mandating that the employee contribute anything. Most of the times when this is the case the employee doesn’t contribute anything to the account themselves because they think that the employer contribution is sufficient. However, this may not be the best way to go.
Vesting
First, the employer contributions to your retirement plan could be subject to a vesting schedule. This means that the money that your employer contributes to the account may not be all yours until some point in the future. In other words, if you were to leave your job, then you may not be entitled to take all of the money that your employer put into the account for you. It could take years for the money to “vest” and become yours. This is definitely something to consider if you are someone in this position.
Saving Reduces Lifestyle Creep
Saving inherently decreases the amount of money that you spend, which is a good thing because it means that you won’t have to figure out how to replace as much income when you decide you want to retire. On the flip side of that statement, not saving inherently increases the amount of money that you spend and the amount of income that you’ll have to replace to maintain your lifestyle in retirement.
Often when people receive raises or bonuses they let their spending increase without increasing their savings. This is called lifestyle creep. If you’re someone who receives raises and/or bonuses annually but you don’t increase your savings annually, then your spending could increase quickly which will make transitioning into retirement, and potentially a less extravagant lifestyle, more difficult.
Changing Jobs
The stats say you’re going to change jobs. If you have a large percentage of your pay contributed to your retirement account by your employer and you don’t contribute anything yourself, what happens if you switch jobs and your new employer doesn’t contribute nearly as much or requires you to contribute to receive a match?
This could mean that you have to decrease your spending and lifestyle significantly to ensure that you maintain an adequate savings rate.
It’s Up To You
Even if you’re only capable of doing so for a limited period of time, saving your own money to your retirement account early will provide much more flexibility in the future. Saving doesn’t have to be an all or nothing game – depositing a few dollars tomorrow that aren’t in your account today can pay off over time. Additionally, saving more while you’re young and have less financial responsibilities may mean that you have more flexibility to save less in the future or save less in certain periods of your life that call for spending more.
Sure, it’s more fun to spend the money that you make rather than save it, but no one else is going to be there to be there when you want to retire waiting to pay for all of your expenses. While I’m not someone who works at a company that provides a 10%-15% contribution to my retirement plan, I am fortunate enough to receive a 3% contribution as well as additional profit sharing contributions. When I calculate my personal savings rate, I do not include any of those contributions that my employer provides. Partially because some of them are on a vesting schedule, but mainly because I know it’s important that I save a significant portion of my income to ensure that I reach my long-term financial goals
