Saving for Retirement Is Cheap!

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A few years ago, when the economy was great, most of the people who didn’t save for retirement usually didn’t think about it. It’s difficult to think of the far future on a regular day, it’s even tougher to think about it when it’s sunny, beautiful, and there isn’t a cloud in the sky. It’s toughest when the economy is rough, we’re all playing defense, and it doesn’t seem like we’ll even make it to tomorrow, let alone the next twenty or thirty years. It is, however, always important to think about saving for retirement and fortunately it’s not as expensive as you may think. You can afford to save for retirement, it will cost you very little, and I will explain why.

When you make contributions to an employer 401(k), you get an immediate tax deduction if it’s withdrawn from your paycheck. We’ll look at more examples below but if you contribute $100 a pay period and are in the 28% tax bracket, only $72 is deducted from your paycheck (you contribute $100 but get the deduction, so you pay $28 less in taxes). If your company offers a 401(k) and a company match, saving for retirement is even cheaper.

Actual Cost of Saving

Let’s take a look at some example scenarios to see how little it actually costs you to save towards retirement. Our first example is John and he works for a company that offers a 401(k) but no match. He’s in our standard 28% tax bracket and he’s considering contributing the maximum of $15,500 (401k contribution limits). If he’s being paid twice a week, that’s $15,500 spread out across 26 pay periods, or $596.15 each pay period. That comes out to be $465 after taxes – that’s a little too much every two weeks for John.

Instead, he considers saving $10,000 – which works out to be $300 a pay period. More reasonable but still pushing it. If he contributes $5,000 a year, it’s only $150 every two pay periods and that’s something he thinks he can manage. $75 a week towards retirement seems more than reasonable.

What if John gets a contribution match? Many companies offer something like 3% company match on contributions, which pulls your cost down a little more. It’s not accurate to put the 3% back in as a way to reduce your out of pocket costs for saving since it’s deposited into your account, not into your pocket. It’s just a little sweetener you can appreciate when you start making withdrawals in retirement.

So, if you aren’t saving for retirement because you think you can’t afford it, do the math to know for sure.

{ 8 comments, please add your thoughts now! }

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8 Responses to “Saving for Retirement Is Cheap!”

  1. SarahB says:

    I have never worked for a company that offered a 401(K) to their employees right away. Every company I worked for required you to work for them for 3-5 years before you qualified to participate in a 401(K). One of these jobs did offer a pension plan, which they did not inform employees about until they froze it. When I was ultimately laid off from that company during a massive company wide layoff I received my pension with 60% taken out for taxes, I then used the money to start a CD ROTH IRA. I have been adding a little to it each year. At my current job, there is a pension program and I have a small amount of money put into it by my employer. If I were to leave this job I would have up to 5 years to find another job that pays into this same statewide pension program, or take the money in a lump sum to be put into my ROTH. At this point I’m not really sure there is much else I can do to save for retirement.

    • LovePrepaid says:

      I’ve never seen any company that makes you wait 3-5 years before you can even participate in a 401(K) and I don’t think it is even legal. The longest I have seen is one year, and most let you contribute right away. The 3-5 year thing that I have seen is vesting in the company match. They have multiple options, from cliff vesting (where you do not actually get what the company has matched until your 3rd, 4th or 5th year is completed, and at that point you are fully vested in their past and future contributions) to sliding vesting (where you are vested in an increasing percentage each year until you hit the full vesting).

  2. billsnider says:

    I want to note one small downside for the reord that noone seems to mention or calculate in the literature.

    It is assumed that you will be in a lower tax bracket in retirment than what you are paying while working. This is not necessarily the case.

    Lets say that you have $1,000,000 (yipeeeeee) pre tax dollars in your IRA account. Since the MRD is about 3-4% of theses funds, you have to draw and add $30,000-$40,000 to your Social Security and pension amounts. In some cases this may push this incremental money to be taxed at a higher incremental income bracket.

    Bill snider

    • DIY Investor says:

      Good point. Most of my clients do have most of their assets in qualified accounts which they have to draw down as ordinary income in retirement.
      Some have taxable accounts or downsize and get tax free monies from a house sale. It gives them a good opportunity to roll some funds into a Roth at a minimal tax rate.
      What interests me is that many people are unaware that their IRA is not as big as they think!

  3. Christina D says:

    My company has a SEP IRA with no match program but I lost more money in it than I put in so I stopped contributing and moved what was left to a standard IRA.

  4. Michelle says:

    The 2010 and 2011 401k contribution limits are $16,500, not $15,500.

  5. Shirley says:

    The 15% of my salary that went into my 401K was never missed because I didn’t see it. It has worked out very well and now we have an income from it.

  6. jsbrendog says:

    i am glad i started saving for retirement at a young age but seriously, it’s been almost 4 years and i think i have made 8 dollars haha. but I try to get everyone i am close to t start saving as much as they can as early as they can because you never know. I don’t even miss the 15% i contribute combined between my 401k/ira but i will sure as hell love it when the time comes

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