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When you make contributions to an employer 401(k), you get an immediate tax deduction if it’s withdrawn from your paycheck.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.