Money Girl explains how and why an employer matches a portion of your contribution for retirement - and why you may never see that money again.
Q. In Financial Advice That Will Make You Rich, you recommend saving 10% of gross income for retirement. If your employer matches 3% of your contributions, should you still contribute 10% for a total of 13%—or should the combined total just be 10%?
A. Some workplace retirement plans put a vesting schedule on employer matching. That means you have to stay employed for a certain period of time before you own 100% of the company’s matching funds and their earnings. If you leave before you’re fully vested, you forfeit all or a portion of them.
For this reason, I recommend playing it safe and contributing 10% of each paycheck to your retirement plan, regardless of the match you receive. After you’re vested, you can always reevaluate your retirement savings using a Retirement Calculator. That’s the best way to know if you’re setting aside enough each month to achieve your financial goals and enjoy the retirement of your dreams!
Retirement Ahead photo from Shutterstock