If you save 5% of your salary in a 401-K and your employer matches 4%, what is your return on savings before investing?

To determine the return on savings before investing when saving 5% of your salary in a 401(k) with an employer matching 4%, you first need to add the employee contribution and the employer match together.

If you contribute 5% of your salary, and the employer contributes an additional 4%, you effectively receive 9% of your salary combined in your retirement account. The key to understanding the return on savings in this context is to recognize that the employer match essentially increases the total savings without requiring additional contributions from you.

The return can be viewed as the combined benefit of both contributions relative to your own contribution. Specifically, for every dollar you contribute, you receive an additional 0.8 dollars from your employer (4% match on the 5% you save). This means your total contributions turn into 9% of your salary while your own contribution remains at 5%.

To calculate the return, you take your employer's contribution (4%) and divide it by your own contribution (5%). This gives you:

4% (employer match) / 5% (employee contribution) = 0.8 or 80% return on your own savings.

This highlights how significant employer matches can amplify the effect of