Power of the 401K Match for a Dividend Income Investor

Ah, the beauty of being a dividend growth investor.  There are many, er, most of us that still work for an employer that isn’t our own self.  Most of us still work for a firm, a company, a business that pay us on a periodic basis throughout the year, whether that be hourly or salary.  As a benefit of working for such an organization – they may offer a matching policy for 401K contributions.  Today… yes Today, I want to go through the power of the 401K match has on our dividend portfolios!

4 0 1 K – MATCH

The 401K

A 401K is a retirement plan (403b for not for profit organizations) for employers that they offer to employees as a retirement vehicle.  The IRS established income limits that one may contribute to the policy in any given year.  By the way, as I type this – this sounds very boring,  but trust me – getting to the numbers, spices it up a bit, so hang with me.  It definitely isn’t as boring as Bert STILL talking about his ARCP in his last dividend income article.  Bert… still wondering why you didn’t make the income list for bloggers in the community?  Need some new material little guy.  Anyways, I digress…  employers offer a 401K policy that usually is through an investment provider such as Vanguard, T. Rowe Price, Franklin Investments, etc… and primary vehicles are mutual funds, and a pretty small basket that we can choose from as well; at least mine does.

I won’t go into the Roth 401k vs traditional 401k, as I’m not into doing a tax discussion.  But you can’t touch 401K contributions (outside of a few exceptions) until you are 59.5 years of age… you can transfer the assets to another account if you leave the company, however, and invest into essentially whatever you want – even a low yielding, high dividend growth stock, like Lowes, or back into Franklin Investments themselves!  Obviously, this plan is used to transfer from having pension or defined benefit plans for employees to these plans or defined contribution plans for employees – to ensure some sort of value in “retirement” and also reducing/taking away the responsibility of an employer to pay for one’s retirement.  These plans are then used as a way for employees to “save” in a way and now some are mandatory to save a certain % of their income.  In this example and discussion, we will use my employer – and here is their policy: It is through Vanguard and they have 10-15 mutual funds and will match 50% of the first 5% that I contribute.  Let’s get into more details on the policy, eh?

My 401K Policy – Example’d

So my 401K from my employer is a 50% match up to my first 5%.  Nothing more.  That’s it and poof… Not the best plan, but not the worst.  What this really means is 2.5% of my salary they will contribute to my account, given that I contribute 5% of my salary.  Let’s say I make $65,000 (for the record, that is not my salary!).  I contribute $3,250 during the year and at the end – they match and add in $1,625 to my account, awesome!  My firm does an age based contribution as well, a “spiff”, that gets added to my account based on how old I am.  It’s roughly 0.62%, so it’s not much, and to simplify for math purposes, let’s say that’s also $375.  Total contributions from employer are now at $2,000.  Not a bad investment?

The account/fund I have is Vanguard Institutional Index Fund and simply tracks the S&P 500.  The current S&P yield is approximately 2.00% (rounded from 1.96%) at the moment, given the slight “mini” downturn we’ve had.  So, my employer just gave me $2,000 and it’s invested at 2.00%, adding a very solid $40 to my projected/forward dividend income.  That’s over a few percent towards my 2015 goal of $6,750 of forward dividend income.  This investment pays quarterly and, actually, I will receive the match here in LESS than 3 weeks (approximately the 25th-27th of June).  What else is the last few years I have received it PRIOR to the June ex-dividend data.  This means that I already receive dividends off of the shares that the matching contribution buys, it’s awesome.

The other key piece to remember is that the fund also has a dividend growth rate to it, in the year 2014 it was around 13%… I mean, luckily, there are 500 companies within the fund and that gives it a chance for dividend increases, dividend cuts and dividend freezes.   So this matching contribution is providing future dividend income, that is being reinvested (hence the power of the DRIP) to buy more shares, which these shares have increasing/growing dividends on an annual basis and the cycle continues!

Obviously the cons to the policy are the limited funds you can invest into, it could be a poor match or no match policy – or hey – maybe your employer doesn’t have a policy at all.  I have a great idea, let’s look at a 10 year analysis.  Starting at age 27, using a $65K (I’m a bit higher here) figure and a 2.5% match, .6181 age based with incremental of .12 with each year (per our firm policy), 7% income growth rate on the investment, 5% salary growth (mine has been a bit higher than this), sadly – NO DRIP.  Let’s see the results:

401K Match analysisOkay, wow, what does this mean?  The 401K contribution match policy from the firm has grown to almost $800 annually over a 10 year period from the matches alone.  That’s HUGE!  That’s  over $60 extra per month to pay for a few bills or nice meals.  What’s fun, to note – this doesn’t even include reinvestment.  Let’s just say – there is a lot more at the end than $800, considering this investment compounds quarterly… it’s insane if us employees don’t take part in this!

401K Match Conclusion

To conclude – we should take advantage of the match as much as our plan allows us to!  Even if this causes us to save over 60% of our income in order to invest up to the match, lets do it!  The earlier you can do this, the better off that retirement account will be, so that at one point – even if you work for an employer, you could consider not contributing due to the compounding that has occurred – remember the set it and forget it 10 year plan?  This can be part of it too.  From this very basic plan – $800 can be had from matching without dividend reinvestment, which I partake in it – so it’s even extrapolated even higher/more than what’s being reported above.  This will help you reach your goals and find that freedom faster!  Let me know what ya’ll think, your firm’s policy, what you do and how you feel about it.  Thanks everyone!

-Lanny

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12 thoughts on “Power of the 401K Match for a Dividend Income Investor

  1. Great article! The 401k match was one of the biggest reasons I am with my current employer. They offer a 5% core contribution no matter what the employee contributes. On top of that, they will match dollar for dollar up to 5% of your contributions! So if I contribute 5% (which I do) my employer will add 10% to that.

    As an added bonus, my 401k through Merrill Lynch offers a self-directed brokerage account for a small fee. So I’m free to buy any stock in this account. You can only imagine how excited I was about this once I became a dividend growth investor! I’m still in the process of converting a portion of my 401k into this self-directed account and it brings me so much joy.

    Ken

    • Ken,

      Thanks for the post – and damn! That is awesome 10%??? I’d kill for that where I work right now.

      Self directed account – I think I saw you discuss that maybe on your blog – buying stock would be awesome. I’ll have to look into that without a doubt. What’s the fee to do it? Is it annually?

      Nice work and thanks for coming by. 10% is just awesome.

      -Lanny

      • Lanny – The annual fee is $125 which I justify based on the mutual fund fees I was paying. Plus my account value will keep increasing but the fee should remain fixed. So at some point it will become negligible.

        I also take a hit on commissions in this account. It is currently $14.95 per trade. My general rule is to keep commissions under 1% of my trade amount so this forces me to accumulate $1500 for each purchase. This hasn’t been an issue so far since I am selling off my mutual funds and therefore have a lot of capital to play with.

        Ken

  2. Lanny,
    I totally agree. I have a 100% match up to 4% of my salary, so clearly I put away 4% of my base and they match it. Bam, I go from making 100% to 104%. Like you I get a mix of funds to choose from, and I’ve gone away from the retire a ‘xx’ age, and moved towards a small variety of funds that have performed well in the long run. I expect at some point I will roll my 401K over into a Sep IRA, where I can put DGI to full use with a large sum of money that has performed and been stockpiled.
    Never skip on a 401K, its almost FREE MONEY!
    – Gremlin

    • Gremlin,

      Thanks for coming by. Man… 4% is awesome, seriously – I wish my company would up the ante – but the sad part is, I don’t think that companies really evaluate the benefits to their employees these days, when in reality – if they do that, they have better/positive vibes and employees will do “better work” in my mind and/or may keep better talent.

      Regardless – that’s awesome and pumped that you are taking advantage!

      -Lanny

  3. Great post guys,

    As allways a great post! Although im Canadian, I still recieve a similar benifit my employer matchs 5% of my income in a RRSP program.

    Keep up the great content!

    • Patrick,

      Nice, 5% is sick!! Seriously, that is double what I have aka you know what income that is pumping out for you in the long-run then for sure. Pumped you’re taking full advantage, would be wild not to!

      -Lanny

  4. Taking that 401k match is essential. Wouldn’t it be great if we had more freedom in investing that into a dividend stock that we wanted? It’s frustrating that most 401k plans are stuck with directed investment options. But, considering a 50% match with an investment return of 10% per year, you are already 4+ years ahead of schedule if you didn’t get that match. Can’t pass that up!

    Our plan is to convert to a Traditional IRA and do a ROTH conversion ladder so we can draw on our 401k money in early retirement!

    • Mr. Retire,

      I would have to agree. I wish we had more freedom, gosh dang I WISH WE HAD MORE FREEDOM! You really can’t pass up the match, it’s pretty incredible when it’s cash tossed at you. I like the way you are thinking with the conversion ladder, may have to read and look more into that — very interesting.

      Thanks for coming by, glad you like it!

      -Lanny

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