Matching Contributions 101: How to Maximize Your Retirement Savings Now

Here at NCOA, we get a lot of questions about retirement.

When’s the best time to retire? What steps should I take before exiting the work force? How do I create a financial plan for retirement? And perhaps biggest of all: Will I even be able to retire

If you’ve ever asked yourself this question, you’re not alone. In fact, according to a recent survey conducted by the Federal Reserve, only 40 percent of non-retired adults in the United States believe that their retirement savings are on track. Among Black and Hispanic non-retired adults, those numbers are even lower: 26 percent and 25 percent, respectively.

What does this mean in real terms? While there’s no hard and fast rule, many financial experts suggest having the equivalent of ten times your annual salary saved before you retire. Using data from the U.S. Bureau of Labor Statistics on median weekly earnings, most American adults, therefore, should have about $507,000 in net worth (total financial assets minus any debts) before exiting the workforce.

It's a big number. And many “Boomers” (those born between 1946–1964) haven’t yet hit it, says the Transamerica Center for Retirement Studies, a national nonprofit. Neither have many Generation Xers (born between 1964–1978). The center’s May 2020 survey revealed that the median retirement savings among Boomers is $144,000; among Generation X, it’s $64,000. Both figures are a long way from that $507,000.

Still, there’s some good news. No matter your current age, there are strategies you can use to “catch up” on your retirement goals. If offered, one of the best is to enroll in your employer’s matching contribution program.

What is a matching contribution program?

Essentially, it’s free money.

Under these programs, your employer “matches,” to a specified limit, the pre-tax funds you deposit into a defined contribution plan—such as a company-sponsored 401(k), 403(b), or Thrift Savings Plan. The IRS limits how much you can contribute to such plans each year—in 2023, it’s $22,500—so the additional dollars your employer provides are truly a bonus. In other words, this money doesn’t count toward your individual limit; it’s an investment over and above what you make yourself. And, because your employer is contributing on your behalf, you don’t pay any income tax on the match.

How do matching contribution programs work?

Every employer is free to make their own rules; your plan may differ from a family member’s or a friend’s who works somewhere else. Generally speaking, however, these programs follow a similar formula:

1. Your employer agrees to match a percentage of every dollar you contribute to a 401(k), 403(b), or other company-sponsored plan.
2. Your employer continues the match up to a predetermined annual threshold.
3. After a certain period of time, you become “vested” in that match (the money is yours).

How are matching contributions calculated?

This all may sound a little abstract, so here are some numbers using a fairly common scenario in which your employer agrees to match 50 cents on every dollar you contribute, up to five percent of your annual salary.

Let’s say you earn $50,000 a year. That means your employer potentially will contribute as much as $2,500 (five percent of your salary) toward your retirement plan. However, since this is a 50% match, you would need to contribute $5,000 in order to take full advantage of the benefit.

Not to worry, though; you aren’t penalized for saving less. Your matching employer contribution still applies to any amount you personally contribute within the rules. If you save $1,000, your employer will still contribute $500.

As for “vesting”—each employer defines this differently, too. Sometimes, employees become vested immediately. Most often, companies require a waiting period—say, anywhere between 3-5 years—before employees fully “own” contributions made on their behalf. So, if you leave the company for any reason before that waiting period ends, you forfeit your employer’s matching contributions. (You keep everything you contributed yourself, though).

Why do employers match contributions?

There are several reasons:

• It helps employees feel valued and boosts goodwill.
• It helps attract and retain qualified hires.
• It offers a tax deduction for the company.
• It’s required by law in some states.

A note on “catch-up” contributions

If you’re reading this article and are dismayed that you never enrolled in your company-sponsored retirement plan, there’s still time. And the IRS provides for “catch-up” contributions—an additional amount, over the set limit, that individuals over age 50 can contribute each year. In 2023, that’s $7,500—not an insignificant chunk of change. If you’re close to retirement age and in a position to ramp-up your savings, catch-up contributions can help you build a stronger financial foundation for when you do exit the workforce.

And a few words on the Savers Match program

The Secure 2.0 Act, signed by President Biden at the end of 2022, enacted several positive retirement-related changes.

Section 103, the Savers Match, means that the federal government will provide a matching contribution for “low and moderate income” taxpayers who participate in an employer-sponsored 401(k) or other defined contribution plan, or who maintain an individual retirement account (IRA). This is a 50% match, up to $2,000 annually, which phases out at a certain income level. The program will replace what is currently a nonrefundable tax credit called the Savers Credit, but it won’t go into effect until 2027.

Tens of millions of American workers potentially will benefit from this program. If your retirement horizon is more than five years away, and you believe you may be eligible for this new matching contribution vehicle, be sure to keep your eyes and ears on the news. We’ll closely be following developments regarding the Savers Match here at NCOA as well, and will certainly provide resources to help you sign up once it’s time.