Asset formula

78% of workers ignore “the greatest asset to making money”

Saving for a secure retirement requires a number of smart money strategies to be in place and, in the eyes of workers, some factors seem more critical to success than others.

Top of the list in a recent Principal Financial Group survey: getting a matching contribution from your employer into your 401(k) plan. Nearly two-thirds – 62% – of workers identified company matches as important to meeting retirement goals.

That workers love the game shouldn’t be surprising, says Tess Zigo, certified financial planner at LPL Financial in Palm Harbor, Florida. “We like to call it ‘free money’ and it is,” she told Grow. “If I put in 3% of my money and you put in 3% of your money, sign me up! I’ll take your money.”

Getting “free money” is a no-brainer. It’s math. That’s why it’s somewhat curious that only 22% of employees surveyed identified starting to invest early (in their twenties) as important to building a secure retirement.

For some experts, like IRAHelp.com editor and certified public accountant Ed Slott, the other 78% is a major gaffe. “The greatest money-making asset you can have is time,” he says.

Here’s why you should prioritize both to maximize your chances of building wealth for retirement. Here’s a hint: the benefit of starting early also comes down to math.

Getting a match is ‘the #1 thing’

If you’re choosing how to invest for your retirement, it would be wise to prioritize your workplace retirement plan, Grant Sabatier, a millionaire and author of “Financial Freedom,” told Grow. “The #1 thing is to invest enough to get the 401(k) match,” he says. “It’s 100% free money. If they match 50% of your contribution, it’s a 50% return.”

If your company offers a 401(k), chances are it also offers some sort of matching contribution. Of workplaces that offer 401(k) plans, 98% contribute to their employees’ retirement savings, according to the Plan Sponsor Council of America. The most common configuration: the company pays 50 cents for every dollar invested by the worker, up to 6% of salary, according to Council research.

Video by Ian Wolsten

So what impact does getting a matching contribution have on your long-term returns? Consider the following calculation (which you can reproduce and modify using Bankrate’s 401(k) calculator). A 21-year-old investor earns $50,000 and contributes 6% of her salary to her 401(k), which her employer matches for 50 cents on the dollar. His employer raises his salary, on average, by a modest 2% per year, and his investment portfolio earns 8% per year.

By the time she retires at age 66, she will have contributed nearly $220,000 and her employer will have contributed about $110,000. His projected grand total, taking into account the growth of his portfolio: $2.3 million.

If she had canceled the employer match and invested in, say, an IRA, she would have missed not only the employer contributions, but also the compound growth of that money. Eliminate matching contributions and his retirement total will plummet to $1.5 million.

Buffett: Time in the market snowballs for your money

Slott isn’t alone in thinking investors are wrong for not prioritizing time in the market. As a young person, “you have something that older investors don’t: time,” Craig Ferrantino, president of Craig James Financial Services in Melville, New York, recently told Grow. “Time is the best predictor of success in the markets.”

Video by Courtney Stith

The reasoning is, once again, mathematical. Having more time in the market greatly increases the potential boosting effect of compound returns. “The nature of compound interest is that it behaves like a sticky snowball,” Warren Buffett said at the 1999 shareholder meeting for the company he runs, Berkshire Hathaway. “And the trick is to have a really long hill, which means either starting really young or living really old.”

One is clearly easier to control than the other. Going back to the previous assumption, the 21-year-old investor who invested 6% of his salary in his 401(k) and got the match could end up with $2.3 million in retirement. Under those same conditions, if she had waited until 26 years to start investing, a gap of just five years, her projected total would fall to just over $1.5 million. If she had started at age 30, she would have just under $1.1 million by age 66.

The opinions expressed are general and may not be suitable for all investors. The information in this article should not be construed as, and may not be used in connection with, an offer to sell or the solicitation of an offer to buy or hold any interest in any security or product. ‘investment. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance and fees before making any investment decision. No amount of diversification or asset allocation can assure profits or guarantee against losses.

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