Be Efficient with Capital Through – Your Company 401k Match

The other day at work a group of my coworkers and I were discussing our 401k options.  An informal poll took place. I asked my coworkers if they participated in our company 401k, if they knew what amount the company matched, and if they were getting the full matching amount.  I was surprised to find out that not everyone was taking advantage of the company match on our 401k. I am generally not a very judgmental person and I managed to keep my mouth shut, but I really wanted to scream, “WHAT ARE YOU THINKING!?!?!”

Today I am going to walk you through the math of why If you tell me you aren’t getting your company’s full 401k match I am going to silently judge you. Every company is different so it is important to understand what your company benefits are exactly. Getting the full match from your employer means you are contributing enough to meet their requirements to give you the most they will give you.

Let’s say my coworkers were earning an average mining salary of $88,000.  Let’s compare one coworker who is getting the most they can get in company match to one who isn’t getting any company match because they aren’t participating. In this example we will say the company matches all 401k contributions at 50 cents on the dollar up to 6% of your salary.

First we will start by calculating their taxable income. *Note that company 401k match isn’t subtracted from base pay when calculating taxable income.

Table 1

Next we will look at both of my coworkers take home pay after taxes.

Table 2

At this point you will notice the full match coworker has a $4,000 lead over the no match coworker in Gross after Tax plus 401k.  This isn’t a fair comparison because all the 401k money is before tax.  So now we’ll look at what would happen in a worst case scenario where the full match coworker had to take all their money out of their 401k and pay the full penalty and all their taxes to get use of the money.

Table 3I hope at this point you are convinced that your employer matching is the best return for the risk you’ll get on any investment.

So to close I have an offer for my non-contributing coworkers (you know who you are). If you happen to read this post, I would be willing to give you the money upfront you need to start contributing to your 401k and getting the company match and in return you pay me back in full at the end of the year and we split the efficiency bonus money. I am willing to offer a 50:50 split since I am such a fair guy. This would result in wins all around. You win because you wouldn’t see any difference in cash flow. I win because I get half the newly created bonus money. You win again because you also get half of this newly created bonus money.

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