Scrimp on 401(k) Now, Pay Dearly Later
By: BankingMyWay.com Staff

Halting contributions to your 401(k) plan in tough times can add up to tens of thousands of dollars when you retire.

In today's lean times, some companies are trimming expenses by halting the employer match on their employees' 401(k) contributions. In a recent survey by benefits consultant Watson Wyatt, 2% of 248 U.S. companies have already cut back on matching contributions and another 4% plan on doing so. If you start looking to trim your own expenses when money gets tight, don't take the same approach.

 

Long considered "free money" by many financial advisers, employer matches are a great motivator to get people to save for retirement. But the bulk of retirement savings still come from employee contributions. While dropping the match can help a company's bottom line, stopping your own contributions will hurt yours. Here's why: Missing out on even a couple of years of contributions now can leave you paying the price in retirement.

 

To see just how much a hiatus from retirement contributions will cost you in retirement dollars, check out the online Delayed Savings calculator from BankingMyWay.com. To use the calculator, enter your current 401(k) balance, the number of years before you retire and your annual contribution amount. (You can also enter monthly or quarterly contribution amounts.) Next, enter the number of years you plan on suspending contributions and an estimate for a rate of return on your account.

 

Say you're 40 years old and you're able to contribute $8,000 a year to a 401(k) account that holds $100,000. Your company announces it is halting its matching contributions, but has plans to restore the benefit in a couple of years once the economy turns around. While that's bad news for your retirement savings, it's worse news if you do the same. In fact, a two-year hiatus from your retirement contributions could cost your account $105,517 by the time you retire at age 65, assuming an average 8% annual rate of return.

 

If you take a break from your contributions, your 401(k) account at retirement would have $1,316,483. You stand to miss out on more than 8% of your total retirement dollars by skipping just the next two years of contributions.

 

And the younger you are, the more critical it is to keep saving. Reason: The more time money has to grow, the greater the impact on your retirement dollars, thanks to the tax-deferred growth in 401(k) plans. This is why financial advisers say the easiest way to save for retirement is to start early.

 

The importance of these early years means you may even want to increase your contributions in the absence of your company's matching contribution. Many employers limit their matching funds to just a small percentage of an employee's salary. The average employer matches 50% of contributions up to 6% of an employee's contributed salary, according to the

 

Profit Sharing/401k Council of America. So finding a little extra in your budget to put toward retirement can make a big difference down the road.

 

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