The Automatic 3% Raise: How to Squeeze More Money from Your Salary
Most people struggle with the challenge of asking for a raise.
Countless websites and books exist to coach and help you get the raise you want. But what if you could get a raise without actually asking for it?
What if I told you there was a 3% raise you could get easily -- without even speaking to your boss?
Here’s the secret: It’s the corporate match on your 401(k) plan.
Remind me: What’s a 401(k)?
There are two types of 401(k) plans: traditional and Roth. They each have their advantages.
The traditional 401(k) allows you to invest pre-tax money. This means your investments are taken out before your payroll taxes are calculated, thereby lowering your tax basis. You pay less in taxes while earning the same salary.
For example, if your salary is $1,000 a week and you invest $100 -- or 10% of your salary -- into your 401(k), you will lower your basis for withholding taxes from $1,000 to $900.
And there's an added benefit: The money you invest grows without you having to pay any taxes on the gains until you start taking money out, hopefully many years later when you retire.
The Roth 401(k) plan is different. Your investments aren’t taken pre-tax; you make them with after-tax dollars, so you would pay withholding taxes on the entire $1,000 mentioned in the example above. But the $100 you invested would grow, and you would never pay any taxes on that money again.
If you’re investing in your 20s or 30s, that $100 will have decades to grow. If you invest $100 each week in a Roth 401(k), you could have hundreds of thousands of dollars when you retire and not pay any taxes when you withdraw the money.
Does Your Employer Offer a 401(K) Plan?
If you’re a full-time employee in America, you likely have access to a plan, according to a U.S. Bureau of Labor Statistics report released in March. Overall, 66% of private sector employees have access to a retirement plan at work.
The likelihood of you having a plan tends to decline with your salary level; the less money you earn, the lower the chance your employer offers a 401(k) plan. Only about 31% of the lowest earners have access to a retirement plan, while 98% of the highest earners have access to such a plan at work.
Check with your HR department to find out whether your employer offers a plan. Regardless of how much you earn, if you’re eligible, I strongly suggest you take advantage of your company’s 401(k).
How to Get a 3% Raise
So here’s how easy it is to get a 3% raise: Many employers offer a corporate match on your 401(k) contributions.
The most common match is 50 cents on the dollar up to the first 6% you contribute. A 3% match of a 6% contribution in your 401(k) plan is not a hard-and-fast rule across all companies, but it is the most common match.
Let’s say you earn $52,000 a year (or $1,000 a week) and you invest 6% of your salary (or $60 a week). Your employer will match 50% of your contribution, or $30 every week.
This means your employer contributes $1,560 annually to your retirement plan, or 3% of your $52,000 annual salary.
How do you get this corporate match? All you have to do is sign up with your company's HR department to contribute to the company’s 401(k) plan.
As you make contributions, the company will automatically match your contributions based on how the plan is set up. You want to secure the entire corporate match, if you can.
Free Money (Really!)
It’s actually more than that; if you’ll recall, contributions to a traditional 401(k) plan lower your tax basis, thereby keeping more money in your pocket. It’s really a no-brainer.
And if you can, invest more than the level of your employer’s match. For 2015, the maximum allowable contribution is $18,000 (folks over 50 can contribute $24,000). Ideally, aim for 10% to 15% of your salary.
Your investment and corporate match happen on autopilot. Once you set up your investment, the money will be automatically invested and matched by your employer without any further involvement on your part.
And when you get a raise, a portion of it will go toward your investments as well -- this increases the corporate match, effectively increasing your raise!
Start investing in your 401(k) as early in life as you can. The longer your investments have to grow and compound, the more money you will have when you retire.
So start now, and get your free 3% raise. What are you waiting for?
Your Turn: Does your company offer a 401(k) plan? Do you contribute to it?
David L. Wright is a retired CFO. He is author of the Amazon bestselling investing book Investing for the Rest of Us and maintains a personal finance website: DollarBits.com.