One of the topics that regularly comes up in my conversations with younger people when they come to me for advice or at a class I teach on personal finance (At a University in New Jersey), is saving for retirement through a company sponsored defined contribution retirement plan, such as a 401 (K) plan or a 403 (B) plan. There are several rules of thumb on how much one should save, such as the 90:10 rule, which suggests saving at least 10% of income. Starting to save early gives one the benefit of time and, through the incredible power of compounding, can result in retirement savings that can be a very meaningful sum of money. Defined contribution retirement plans have the added benefit of tax deferred compounding. However, many youngsters have trouble saving for retirement, especially early in their careers and most do not contribute the maximum possible amount ($18,000 in 2017).
In defined contribution plans with employer matching, not contributing at least as much as the employer match, is like turning down free money. Unfortunately, many 401(K) participants do not take full advantage of the employer matching because they do not take the time to understand the details of employer matching or they are too complicated for them to understand (Formula, vesting, minimum tenure etc).
According to a study by Vanguard, 19% of employees who had the opportunity to contribute to a 401 (K) or similar work-related retirement plan in 2016, did not participate. The participation rate was much worse among employees earning less than $30,000 (34% did not part participate) and those younger than 25 years of age (Almost 50% did not participate). Automatic enrollment alleviates the situation but does not completely solve it as automatically enrolling at a lower level (than the maximum match threshold) will result in a lower match.
According to calculations by Sarsi, LLC, assuming a starting salary of $50,000 growing at 3% per year (The average inflation rate in the US as per data from the Federal Reserve of St. Louis), a 4% match (The average/median value of match contributions in 2016 as per Vanguard), and an investment rate of 10% (Long term return on US stocks as per CRSP at Chicago Booth) an employee is giving up about $1.2MM over 40 years. If the investments grow at 7.5% (Typical returns for a 60:40 portfolio over the long term) she would be giving up $660,000.
Most people begin to understand the importance of saving for retirement and employee matching later in life. Still, not taking advantage of employer match even for a few years can make a big dent in retirement savings. Using the same example as above, delaying contribution by one year reduces the retirement portfolio by $82,000 and $34,000 assuming 10% and 7.5% return respectively. Delaying by two years reduces the portfolio value by $160,000 and $66,000 respectively.