401(k) Match Calculation PFI 3301


Hello everyone! I want to walk through an example with you
of a 401(k) match calculation. This is an example of a question that will
probably show up on the exam, so I want to walk you through this one and see if you can
figure out how to modify it for our project. Your employer offers a 401(k) match of 50%
of your contribution up to 6% of your gross salary. Note that I changed the wording a little bit
here to clear it up. Your gross salary is $60,000 a year and you
plan to contribute $3,000 per year to the 401(k). This question wants to know how much free
money are you leaving on the table? Let’s look at this calculation a little
more in-depth. What does the 50% up to 6% mean? The 6% of your gross salary is the maximum
contribution to your 401(k) that your employer will be willing to match. If my annual salary is $60,000, then I am
going to multiply that by 6% to get $3,600. This is my contribution to my 401(k). Then, my employer is willing to match 50%
of my contribution, or 50% times $3,600, which is $1,800. So I am going to contribute $3,600, my employer
is going to contribute $1,800, and I will have a total annual contribution of $5,400
to my 401(k). This is assuming you contribute the maximum
up to the employer match, but in this example, you only contributed $3,000, not $3,600. Let’s re-do the calculation assuming you
only contribute $3,000. Now, your employer is still only going to
match 50% of your contribution, so they will contribute $1,500. That means that the total contribution will
be $4,500. In total, your contributions decreased by
$900. $600 of that was from you, and $300 of that
is from your employer. That $300 is lost to you forever because you
chose not to participate in the employer match. Now, you could argue that you now have more
money in your pocket to spend, but if you do not plan for retirement, then you will
have no money to spend when you have no way of earning income. How much would this $300 per year would be
worth if you worked for the company for 20 years? Don’t forget that you would have raises,
so it would be a larger savings per year. That is a lot of lost income because you did
not contribute the maximum to your 401(k).

Paul Whisler

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