Morningstar Money Challenge: Day 14

Today's Task: Maximize your employer's retirement match

Ruth Saldanha 19 November, 2020 | 4:38AM
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This article is a part of a month-long Morningstar Money Challenge. You can find the details here.

Over the past two days you’ve checked out the benefits that your employer offers, and you’ve opened a retirement account. The next step should be pretty obvious – you need to maximize the free money you get from your employer match in your retirement account!

Now in the recent turmoil of 2020, and the volatility caused by the coronavirus pandemic, many companies reduced their retirement matching contributions or even eliminated them. But many of them tend to reinstate these benefits when times improve.

If you are lucky enough to earn matching contributions on your retirement contributions, Morningstar’s director of personal finance Christine Benz recommends that you plan to take advantage of each and every one of those dollars. Remember, it’s free money!

“This is particularly relevant if a) you're highly compensated and b) you expect to receive a bonus early in the year. That's because you're only allowed to contribute a certain dollar amount to your retirement account in each calendar year. If you receive a big bonus early in the year and you're contributing a bigger percentage of your salary to your retirement account than your employer is matching, there's a chance that you'll hit your dollar contribution limit well before the year is over. In turn, you won't be able to take full advantage of any matching contributions your employer would've made in the remainder of the year,” Benz warns.

When it comes to a bonus, the important takeaway is that you should check with your employer to find out whether your retirement contribution is being deducted from your bonus. If it is, you may want to lower the percentage amount that you're contributing to your retirement account before you receive the bonus, Benz says.

“In so doing, you'll ensure that your own contributions are spaced throughout the year, and you'll be able to take full advantage of your employer's matching contributions,” she adds.

Additional Reading
-          Your First Date With Your RRSP
-          RRSP: Tax-Deferred is Tax Saved
-          Don’t ‘Save’ in Your TFSA - Invest 

A Million Dollar Retirement Account
When we talk about getting a million-dollar retirement account, these discussions always garner a lot of attention. But is a million-dollar nest egg enough anymore? 

Well thanks to inflation, your million dollars will be worth closer to $500,000 of today's dollars after 36 years, at current inflation rates. A million dollars sounds like a lot of money, and for frugal people, it may be enough--especially if their savings rate was very high in the years leading up to retirement. But for people who have higher spending wants or needs, $1 million probably isn't going to be enough, Benz cautions.

The sad fact is that our dollars grow less valuable over time, because of the cost of things that we buy trend up over time. Starting with a million-dollar target isn’t a bad idea, as long as you re-evaluate it and build upon it, early on once every five years, and then annually.

Start with small goals and work toward gradual increases--for example, start out by saving 10% a paycheck but plan to increase that amount by at least 1% or 2% per year, Benz said, adding that this strategy syncs up with many people's earnings patterns as well. Salaries start on the small side but ramp up over time, she noted.

Finally while investing can be incredibly powerful, ultimately your savings rate will be the key determinant of your success or failure, Benz said. That's a really unsexy point, to make, but it's also empowering--you're in charge of your financial future more than market vagaries.

Additional Reading
-          RRSP: You Need A Plan
-          Should Your Borrow for Your RRSP?
-          A Million-Dollar RRSP

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About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Follow her on Twitter @KarishmaRuth.


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