“Not so fast, my friends”

Monday, November 17th, 2008 by Cass Chappell, CFP®


“What can I do to capitalize on the current market downturn?”

A frequent recommendation, which affects most of our clients, is to consider increasing retirement contributions.  If you can afford to increase your salary deferrals into your company’s retirement plan, it may be a great opportunity for you to “max out” your plan. 

But, be careful…..

Several times a year we find someone who is maxing out their retirement plan very early in the year.  Makes sense right?  Get it in there quickly so it can go to work…….

As Lee Corso, ESPN College Football analyst, says: “Not so fast, my friends”

If your company offers a match, maxing out your retirement account early in the year will usually leave money on the table.

An example

Company ABC offers a 5% match

Joe Smith earns 100k per year

2008 401(k) maximum contribution is $15,500

Joe contributes 20% of each paycheck into his 401k.  He will max out his 401k some time in October ($15,500 is 20% of $77,500).  This means that his employer will not match his contributions for the $22,500 that he earns the remainder of the year.

In this example, Joe left $1125 on the table (5% of $22,500 is $1125).

An employer only matches contributions as the EMPLOYEE makes contributions. 

To maximize the employer match, it is important to max out the plan as late in the year as possible. 

To calculate how much to contribute in order to max your account out at the end of a full year, divide your salary (include the bonus if your employer uses the bonus in the matching formula) by the current year limit.

In the example above, Joe should contribute 15.5% of his salary.  By doing this, he will contribute the full $15,500 into his plan AND the company will match for the entire year (putting $5000 into his plan).

If you are a high earner (over 250k in 2008) there is a caveat to this, however.  In 2008, only the first $250,000 of salary is allowed to be matched (this maximum match amount is indexed for inflation).  Since the employer only matches as the employee contributes, someone who earns a salary of 250k or above would want to contribute 6.2% of their salary.

By contributing 6.2%, the maximum $15,500 will have been contributed by the time this employee earned 250k (whether that milestone is hit early or late in the year).


This is an illustration of how the mechanics of company matching contributions can work.  Your results will vary.

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