From time to time, I come across individuals who tell me that they cannot afford to participate in their company’s 401(k) plan. I ask them just two questions: Do you get a tax refund? Does your 401(k) pay a match?

You can probably guess where I’m going with those questions.

Take this situation. “Jerry,” age 25, sets aside $250 a month into a savings account. He likes to get a tax refund each year, so he fills out his Form W-4 at work to have extra money taken out of his pay for tax withholding. That leaves him with a paycheck that just covers his monthly living expenses, with no opportunity to contribute to his 401(k), even though he is eligible. He feels he has plenty of time to save for retirement later — much later.

Does Jerry even know that the company’s 401(k) plan has a dollar-for-dollar match up to 6% of his compensation? Since he doesn’t have any extra money on hand to contribute to the 401(k), he doesn’t care.

What’s wrong with this picture?

Every day that goes by, Jerry is losing money — and he has no idea that’s happening.

Let’s just look at his current numbers.

Saving $250 a month comes to $3,000 a year; within the 401(k), that’s worth $6,000 a year (due to the $3,000 match) before investment results. He is paying a tax of $450 that he would save by contributing pre-tax to the 401(k), assuming an effective tax rate of 15% (15% of $3,000). Add that up, and you’ll see that he’s losing $3,450 by not participating in his 401(k).

That’s year one. Jerry is losing much more when you look at the long-term effect of not participating. Forty years into the future, when he reaches age 65, that one year of not participating in his 401(k) could cost him hundreds of thousands of dollars.

Here are the hard, cold facts for just missing a single year of the employer match. In the worst historical 40-year period (age 25 to 65) going back to the 1930s, he would have missed the opportunity for an extra $100,000 by age 65; in the best historical 40-year period, the “loss” would be $315,000. (This assumes an S&P 500 Index return on just the $3,000 match.)

What if Jerry actually contributed $250 a month every year for 40 years, increasing that amount yearly by 3% to keep up with inflation?

In that case, looking back from age 65, we’re talking about a historical worst balance of $3.3 million and a best balance of $10.2 million, again assuming an S&P 500 Index return. His total contributions would have been about $451,000, one-half of which were funded by his employer.

Sometimes it pays big-time to use other people’s money.

What if you don’t have Jerry’s $250 a month of savings, but you get a tax refund every year? Getting the refund means you are telling your payroll department to send the U.S. Treasury (through IRS Form W-4) more of your paycheck than is needed to pay your income taxes.

The W-4 gives you power. You can essentially reroute that tax refund into your 401(k). In some cases, you can work your W-4 and your 401(k) contribution to avoid reducing your paycheck by much if at all.

Again, it’s all about knowing how to utilize cash — by paying more in taxes than you need to, you are effectively letting the government use your money instead of using it yourself. If this topic is of interest to you, attend my virtual talk on W-4s and 401(k)s sponsored by the Greenwich Library on Wednesday, Oct. 18, at 1 p.m. EDT. Register at tinyurl.com/bdbne4vb.

Finally, don’t forget to apply for the 401(k) Champion Award, which is accepting applications now. See 401kchampion.com.

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Seasoned investment counsel (tinyurl.com/52nus8hz) and award-winning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read her latest book, “The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients)” (tinyurl.com/4u7h9pjs), published by the American Bar Association. Write to Julie at readers@juliejason.com. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future column.

COPYRIGHT 2023 Julie Jason