If you don’t like free money, then you can stop reading now. This article is not for you. But if you do like free money, I have one piece of advice for you. Enroll in your company’s 401k program now! With a company match, even if your balance doesn’t accrue any additional earnings from investments, you will still come out ahead. Not participating in 401k is simply foolish. I was foolish a few years ago when I decided to opt out of enrolling in the company 401k plan and I regret it to this day.
I bought my house in March 2005. But since it was in the process of being built, I didn’t have to make any down payment until it was complete. I had about 18 months to accumulate as much savings as possible to come up with 20% down payment. That’s when I decided to opt out of 401k program so I can pocket that amount instead. Back then, my gross salary was around $50,000. My company’s 401k program allowed us to contribute 6% of our salary and they would match 100% of it. Any additional contribution from my end would not be matched. So in 18 months, by not contributing to 401k, I had an extra $4,500. But it was actually less than that because it needed to be taxed. So I actually took home around $3,000. It turned out that I didn’t need this money as part of my 20% anyway, so the effort was wasted.
How Much Money Did I Lose?
Had I enrolled in my company’s 401k program and contributed 6% to the account, I would have had $9,000 including the company match at the end of the 18 month period. Now this amount does not account for investment returns I would have had during that time. At an annual historic average return of around 10.5%, that $9,000 would now be close to $15,000 today. That’s a difference of $12,000. If I carry this number to another 30 years, it would be at an astounding value of nearly $300,000!!
To simplify the math, I assumed $9,000 at the start of January, 2007. That was 5 years ago. At 10.5% annual return, that’s how $15,000 and $300,000 came about.
$9,000 x (10.5%)^5 = $14,827 after 5 years
$9,000 x (10.5%)^35 = $296,430 after 35 years
Don’t be like me and be dumb by ignoring your company’s 401k program. By wanting to pocket $3,000 a few years ago, I will have lost $293,000 by the time I’ll be ready to retire!
Ok, I’m depressed now.
This is the latest edition of our new series called MoneyFail.
photo: morguefile.com
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{ 9 comments… read them below or add one }
Those early contributions can really add up. Although I don’t have access to a 401k I know I need to be saving a lot more for retirement.
Andy Hough recently posted..My Picks for the Money Pros Index Fund Challenge
Whoa, that’s depressing.
Hopefully you are getting all the match in 2012 and maybe contribute a little more than that to catch up?
retirebyforty recently posted..Carnival Of Retirement 2nd Edition
Did your house go up in value? If it did, you would deduct the increase from your loss. You are not alone when it comes to 401k contributions. Time is on your side, but people ignore that aspect. The sooner you front load a 401K the better off you are.
krantcents recently posted..The 3 A’s of Success
yeah, i think people in general, especially younger generation, don’t realize just how much they’re missing out by not thinking about retirement early enough.
It’s all right, just say, “sunk cost,” “sunk cost.” Every person has things he/she wish happened differently, but now you know.
Well Heeled Blog recently posted..Income, Goals, and What Is “Enough”
yeah, it’s definitely sunk cost. I wasn’t thinking of it much at all until i started writing this post!
I agree with Well Heeled – it happened so what? Move on and try to do your best now, and don’t dwell on it.
Aloysa @ My Broken Coin recently posted..Stop Being Cheap and Invest In Yourself
401k’s are great with the match! Don’t pass up free money ever!
Robert @ The College Investor recently posted..eCampus Textbook Rental Review
Sure, regrets can get expensive. Had I bought Wal-Mart stock way back when in college when I was thinking about it, and re-invested the dividends….
101 Centavos recently posted..How To Raise A Millionaire: Yakezie Blog Swap
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