Ever wonder how much money you need to retire? Experts suggest that for each $1k of money to spend each month during retirement, you need to have $150k in financial assets. So to generate $10k per month (or $120k per year), you’ll need $1.5 million saved up. That’s a lot of money.
How can you ever manage to save that much money? Contributing to a 401(k), 403(b), or 457 plan at work is one of the best tax shelters available to people during their working years. Amounts contributed generally reduce your taxable salary and grow tax-deferred. For 2015. you can make salary deferrals of $18k into your employer’s plan. Anyone 50 of older can contribute $24k.
If you are fortunate to work at a business that matches your salary deferrals, Rule #1 is very obvious. Put away enough to max out employer contributions. Otherwise, you are leaving a portion of your compensation package on the table.
What if your employer does NOT make any matching contributions? In this case, the advice I routinely give is quite simple: No Match Does Not Mean No Good.
Here’s why. Let’s assume you’re in the 25% federal tax bracket and the 5% state tax bracket. Every dollar you contribute in salary deferrals saves you 30 cents in taxes. It only costs you $700 in after-tax dollars, therefore, for every $1,000 you contribute to the plan. You’ve already earned a 43% return on your money. ($300 / $700 = 43%)
Yes, you’ll owe taxes on the money in your 401k, 403b, or 457 plan when you retire. But as long as the money stays invested, the government lets you keep the compounded earnings on the taxes you didn’t pay.
Let’s look at an example of $100k invested earning an 8% return over 25 years: This money would grow to $685k within your retirement account versus only to $370k in a taxable account assuming all the earnings were taxed each year. That’s the power of tax deferred growth!
Please watch our 2-minute recorded presentation on this topic available at: https://youtu.be/aKPWrRDA-GI.