Do you ever keep yourself awake at night by playing the greatest hits of your errors, goofs, and embarrassing moments in your head? One that popped into my mind and haunted me recently was thinking about how I didn’t sign up for my company’s 401(k) plan when I first entered the workforce.
At the time, it didn’t seem like a big deal. I was already doing a good job of adding money to my savings account, and retirement was ages away. Why should I bother with all that paperwork? Ah, youthful ignorance — I mean innocence.
Let’s do the math so you can see exactly why this slip-up has been haunting me.
Four years of missed opportunity
When I landed my first job right out of college, I was thrilled just to be working and earning a steady paycheck. I was completely focused on learning my responsibilities and befriending my coworkers; I wasn’t ready to take on any extra homework at the time, including setting up my retirement account.
Unfortunately, I let that state of mind drag on for four years. That’s right — the length of a whole presidential term passed before I finally gathered the digital paperwork needed to set up my 401(k). (And lesson learned: Actually doing the big thing you’ve been procrastinating on is never as bad as you think it will be.)
Lots of lost compound interest
The reason this mistake was so costly is due to compound interest. This is when you earn interest on your money, and then the new total amount continues to earn interest. Like a snowball rolling downhill, your funds will grow slowly at first but grow by larger amounts each year as time goes by.
At the time, my company offered a 401(k) contribution match of up to $1,000. Let’s say I put in my own $1,000 to meet that match each of those four years. The average annual rate of return of the S&P 500 during those years was 14.78%. That means my $4,000 of contributions would have been worth about $10,600 after four years (thanks in part to the company match). And now, 10 years later? It would be worth nearly $39,000. Heavens to Betsy.
Small contributions can lead to huge totals
It doesn’t matter whether you’re just getting started in your career or you’ve been in the workforce for a while. You need to make sure you’re taking full advantage of your retirement accounts, whether that’s a 401(k) with a company match or an individual retirement account (IRA) that you set up yourself.
If I could tell 22-year-old me a few things, one of the first would be to get into gear and sign up for that 401(k). It would have only taken just over $80 a month out of my own pocket during those four years to make it happen. Though I wasn’t earning much back then, my expenses were low and I could have easily afforded that amount. But I never took the time to think about what I’d miss out on down the line.
However, I’d like to give myself a little credit. I met my future husband on the first day at that job, so clearly I wasn’t making all bad decisions.