If you were to advise co-workers about why they should contribute to (and/or maximize) their 401(k)s, what would you say?
When advising others about why they should take advantage of their 401(k) there are the obvious reasons like paying less in taxes and not leaving employer matching money on the table. Surprisingly, I’ve found these aren’t really the best motivators for most people. In general, people are aware of these benefits but don’t always understand how it impacts them. I think it’s important to help others see the impacts a well-funded 401(k) can have on their life. For me, my 401(k) represents personal freedom and that’s how I tend to talk about it. Freedom to leave a job I hate, freedom to make a career change in midlife, freedom to spend my time as I want to. I was lucky to have someone put me on the path to 401(k) contributions early in my career. At the time I didn’t really understand what matching was or how having less money in my paycheck could save me money on taxes. When I got my first real job with a 401(k), my coworker’s mom sat us both down and basically made us sign up and contribute enough to get the full match. My parents didn’t have any money in a 401(k) at the time so this early intervention from someone else was especially critical for me. I never had that extra money, so I never missed it. Over time as I watched the balance grow, I came to understand the value of it. There were times later in my career where my employer stopped matching and because I had come to value my 401(k), I kept on contributing even without the match. I’m so grateful to have learned this lesson early. Starting early and saving consistently has put me in a position to be able to quit my corporate job by age 55, if not sooner.
My company has a unique approach for encouraging people to open a 401(k) and set up contributions. A big part of our annual compensation is a profit-sharing bonus. Every year the bonus is allocated in two parts, one part is a cash payout and the other is a 401(k) contribution so you have to open a 401(k) or you can’t get that part of your bonus. We also have the option to direct more of the bonus to the 401(k) and less to cash if we choose to do so. I have consistently taken advantage of this amazing option to build my 401(k) and reduce the tax burden of the bonus. As a manager, I am the person who communicates to my direct reports what their bonus and raise will be every year. When I do so I encourage them to divert more of the bonus to the 401(k) if they can. If the are getting a raise, I try to help them see that if they can continue to live on what they have been making, they could take that raise and increase their 401(k) contribution.
What actions have you taken to inspire non-participants to participate in the 401(k)? Please explain, being as specific and detailed as possible.
My friends, family and co-workers have all come to know that I am passionate about saving and achieving financial independence. Over the years I’ve encouraged many in my circle to take that extra money from a raise or promotion and use it to max out their 401(k). I’ve educated people on the value of their HSA and have gotten many to start investing in theirs. A lot of people don’t realize HSAs reduce tax burden, provide investment options, reduce medical expenses, and allow you to withdraw funds for any reason after age 65 which basically turns them into a secondary 401(k). When my freelance writer husband got his first job with a 401(k) in 20 years, I showed him how maxing it out would help reduce our taxes while providing an opportunity to increase our savings rate and he’s been maxing it out ever since.
Because I was lucky enough to have my friend’s mom put me on the path to savings early in my career, it’s become a mission of mine to be that person for others. While I don’t have children of my own, I have several nieces and nephews who are coming of age. When they graduate from college and land that first real job, I take the opportunity to educate them and given them an extra incentive to start investing in their 401(k). I talk to them about my own savings journey and how starting early has a big difference in my journey to financial independence. Using charts that show the difference between starting to save $200 per month in your 20s, 30s and 40s, I help them understand the value of compounding interest. I then give them a copy of the book “Broke Millennial” and make a promise - if they will open a 401(k) and contribute enough to get the full employer max for a full year, I’ll give the $500 to spend on whatever they want. From there I follow up to see how they are doing, answer questions, and of course pay up when they finish that first year of savings.