Michael on November 28th, 2007
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Most employers now allow you to make changes to your 401(k) plans throughout the year. Still, annual enrollment is one of the precious few times people tend to review (even if briefly) their benefit decisions.

In addition, it’s also nearly the end of the year.

You: I knew there was a reason I read this blog. That’s real helpful. What gave you the insight? Christmas music?

Okay, okay. I make the point that the year is nearly out because certain opportunities will pass you by if you don’t take advantage soon.

You: The Black Friday sales? Darn it!

No, fortunately, that is not what I’m talking about. Rather, think about your employer match. We’ve talked in the past about the importance of an employer matching program–regardless of the calendar.

Yet December brings up some interesting opportunities. because your employer match is typically capped as a percentage of your pay per year.

You: Huh?

For example, your company may contribute 50 cents to your 401(k) plan for each dollar you contribute, up to the first 6% you contribute of your gross pay each year. In such a case, the most the employer will contribute equates to 3% of your gross pay.

You: That’s it? Just 3%?

Look at it as a 3% raise for no additional effort (i.e, more projects, getting in early, kissing up to the really weird guy in HR, etc.). Just an instantaneous 3% raise. You wouldn’t turn that down.
You: True enough. But where are you going with this? I haven’t been taking advantage of the 401(k) match as much as I could have been so far.

Usually the cap (the maximum matched) is per calendar year. So those who contribute aggressively see their matching contributions stop at some point during the year, not to begin again until the following January.

You: As I said, that’s not me.

I know. But the concept of the cap also presents an end of year opportunity if you have yet to take maximum advantage of your employer’s generosity. You can still receive enormous benefit from your employer’s matching program by aggressively saving between now and the end of the year.

Let’s take an example. Say your gross pay is $50,000 and you have a 50% match, capped at 6%. By contributing 10% of your gross pay for the month of December, you’ll save about $417. Your employer will chip in a matching contribution of $208, so $625 will be added to your 401(k).

You: But I don’t have $417.

You don’t need $417 because this strategy won’t cost you $417.

You: How so?

Remember, a 401(k) contribution saves you taxes, as that $417 contribution would have only been about $313 had taken it in your paycheck. (Perhaps less, depending on your state). So the “cost” is far less, perhaps half, of what you wind up adding to the account?

You: Half?

Half. Your cost is $313, yet $625 is added to the account.

You: Wow.

Keep in mind that the most your employer would have matched all year long is $1,500 (that’s the 3% maximum of your $50,000 salary). While you won’t get that much money for one month’s effort, you’ll actually get 14% of your maximum possible match just by participating aggressively in December.

If you can afford more than 10% for the month, you’d claim even more of that “free money.” So, if you’ve just recently started a job and are thinking about taking care of this retirement planning concept in January, don’t delay! Take some of your 2007 matching money right away.

You: But what about me? How am I going to be able to save 10% when I haven’t been able to save anything so far? Plus, the holidays are coming. Isn’t this the most difficult time of year to save?

You could argue that. It’s also one of the easiest, since more of your expenses this time of year are discretionary (wants) vs. non-discretionary (needs). You choose to spend more this time of the year rather than being truly compelled to. Think of buying tickets for someone to see “Rent” vs. paying rent).

For one thing, look at The Top 10 Saving Strategies if you haven’t already done so. Many people tell me after they understand how much free money they are turning down, saving becomes much easier.

In addition, if you are one of those folks who is always getting a big tax refund, consider temporarily lowering your tax withholdings for the rest of the year. Do so at the same time that you raise your 401(k) contribution. This calculator can help you with your numbers.

You just might find that you can actually increase your net pay, increase your 401(k) contribution, and get the free money a match provides — all at the expense of an income tax refund you shouldn’t want anyway (a dollar today is far better than a dollar a few months from now).

There are so many opportunities at the end of the year — with or without annual enrollment. Take advantage. Choose to live Beyond Paycheck to Paycheck.

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