I know this is practically heresy around the personal finance community, but I don’t think everyone should contribute to his 401(k) or equivalent, even when a company retirement match is available. I didn’t think that I held that opinion until I advised a coaching client to pass up his unlimited 100% company 401(k) match.
I am supposed to advise my coaching clients according to the Dave Ramsey Baby Steps, perhaps with some reasonable modifications. Starting Baby Step 4 (saving for retirement) early to take advantage of a company match while still on Baby Step 2 (paying off non-mortgage debt) is a reasonable modification that was endorsed by the person heading up this coaching program. So the fact that we are using the Baby Steps as the framework for our coaching was not the sole reason that I discouraged this client from contributing to his workplace retirement account.
The company retirement match is really a wonderful opportunity that people should, by default, take advantage of. Depending on whether your match is 50%, 100%, or some other fraction, that is a guaranteed return on your investment even before your money goes into the investments that you choose. Considering that the stock market may only give a 10% return over the long term, getting an immediate 50% or 100% return is really stupendous. By passing up a company match, you are essentially giving yourself a pay cut, and who would do that?
The only reason I think that you should pass up a company match on your retirement account is if you are living with so little margin in your life that it isn’t clear that you will be able to consistently pay your basic bills. The lack of margin could be evidenced by either drawing up a close/in-the-red budget or having absolutely no available cash for a rainy day.
Many young people just starting out may have trouble balancing their budgets. Perhaps they have quite high minimum payments on their debt, have inflated their lifestyles past the ability of their income, or don’t yet know all the expenses that will crop up over the course of the year. If you draw up a budget that either shows that your income won’t cover your basic expenses and minimum payments or it’s very close, you should focus first on making your expenses come in safely below your income before starting to save for the long term because not going into (likely credit card) debt if you have an off month should be the higher priority. To create that room in your budget, you can either cut your expenses or earn more money.
Even if your budget shows that you should be in the black by a small margin, if you don’t have a bit of cash set aside you may very well be blindsided by an unexpected expense. Even if you are just inexperienced with budgeting you may not know all the expenses that pop up once or twice per year, and you don’t want to let one of those random expenses derail your budget by not having any savings. This savings could be in the form of a small emergency fund or perhaps some money you just have set aside for targeted savings.
Once you have a budget that is consistently balanced with some margin built in and you have some cash set aside, I think you should take advantage of your company match even if it means only making the minimum payments on your debt. (Unless you have such high-interest rate bad debt that it is ballooning out of control – that you should knock out before starting to save for retirement.)
Though my client was doing very well keeping his expenses low, he still didn’t have a plan for how to live on his income while making his minimum debt payments. I therefore had to advise that he work on generating consistent side income to first balance his budget and then contribute to his retirement fund. I emphasized to him that he had a great opportunity with the company retirement match and that he should use that match as a carrot to meet his side hustle goals.
Do you think it’s ever advisable to pass up a company retirement match? Have you ever had a company retirement match available to you that you didn’t take advantage of?
photo from Free Digital Photos