D.C. is Giving Money Away

Here’s a big slap in the face for those out there who aren’t taking advantage of their employee-sponsored retirement plans.

Two-thirds of Americans have employee-sponsored retirement plans – 401(k)s or something similar. Forty-four percent of part-time employees have some type of plan as well.

But only one-third of workers are contributing to them.

And that’s a real sin because they’re throwing away a small fortune.

The combination of reducing your taxable income each year by the amount you contribute to your 401(k) and the benefit of having your money grow tax-deferred is worth a lot of money.

And the federal government is paying for all of it.

Yup, as much as I hate subsidies to folks like us who are making and have some money, the government will pay for 20% to 30% of our retirements if you take advantage of these plans.

Do the math! If you make $75,000 and contribute $10,000 a year to your 401(k), the government pays about 22.5% of that contribution through the reduction in taxable income.

Add in the tax benefit of tax-deferred growth for 30 or 40 years and that 22.5% increases to around 35%.

And let’s not forget the employer match. Over the years, mine has averaged about 3%. Not a fortune and there are better plans, but since you walked out of your parents’ home, when has anyone ever given you 3% of anything?

Figure $10,000 per year for 30 years at 7% (the long-term return of the broad market). That works out to a contribution of $300,000 from you and $790,000 in growth. That’s $1.09 million.

With a 3% contribution to your plan from your employer, that increases to a total of $1.15 million.

And these numbers assume you never get a raise, you get only a 3% match (I know plans that match 9%), you never increase your contribution percentage and you don’t fund an IRA. (That’s another tax-deferred option.)

But the best part is that at retirement, you actually have $1.15 million in your account, not whatever would have been left after the taxes on any interest, dividends and capital gains over 30 years.

If you are 55 years old, can work to age 70 and, like most boomers, have saved nothing, you can still make a difference in the quality of life you will have in retirement.

The 15-year number for this example works out to $486,000. Yes, that’s less than $1.09 million, but it’s a lot more than most have now. And the lesser amount can easily provide $20,000 to $25,000 in income per year in retirement.

And remember, no matter how much you contribute, the government is subsidizing a big part of your plan through the tax benefits.

So knock off the “I don’t have the cash to fund my plan” stuff. The reality is you can’t afford to give away as much money as the government is throwing at you.

Think of it as payback for all the taxes you have paid and got nothing for.

Good investing,

Steve

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Source: Wealthy Retirement