Hancock Saves One of the greatest tools available to individuals for retirement savings is the 401K. It is easy to contribute to by payroll deduction, the money is done pre-tax, and because the individual never has the money in their possession it is never missed. And yet, even though 70% of employees have some type of retirement savings plan available to them, only 70% of them participate (Profit Sharing/401K Council of America). Many companies offer a match to any funds you contribute up to a maximum percentage. A typical match is 50% up to a maximum of 6% of your wages. This means if you put 6% of your pay into your 410K, your employer will put in another 3% totaling 9% of your pay going toward retirement savings. With this plan you almost have the 10% and the after-tax cost to you is only 4.5%. (6% x 25% tax bracket=1.5%) In other words, if you had taken the money to spend you would have only taken home 4.5% of your income because taxes would have taken the rest. So how much money are we really talking about? Let's assume an income of $15,000 per year. If you contributed 6% of your pre-tax pay, you would save $900 per year or $17.31 per week. Or, if you did not put that same 6% in your 401K, what you would the amount you would get after taxes is $12.98 per week. (This is assuming about 25% total for taxes.) Is there anything you could give up or cut back on to be able to put $12.98 in to you retirement? That might be one less fast food meal with you and the kids or a couple less beers on the weekend. After a few weeks you probably won't even miss the $12.98 and because your savings will be taken out before taxes and might include an employer match, you'll be saving quite a bit more than the cost of a fast food meal! This is especially important for young adults since participation from employees younger than 30 are very low (9%) and people in this age group typically are saving very low amounts into retirement (2%). Young adults need to understand the importance of early contributions because a small contribution at age 25 can grow to substantial sum at age 65 because of the miracle of compound interest. Example: With our $15,000 per year income, saving $1200 a year (your $900 + match of $300 = $1200 saved a year) at a conservative 5% return grows to $152,200 by age 65. If you put it off for just 10 years, the same $1200 will only grow to $83,713 by the time you are 65. To get the same amount of money by age 65 you would have to contribute $2182 per year instead of $1200. If you wait 20 yrs before you start, the your $1200 will only grow to $41,663 by age 65 or less than a third of the amount had you started earlier. To get the same $152,200 you would have to save $4384 per year instead of $1200. So starting early means you can save smaller amounts but have more money in the end! The sooner a person starts to save the better. Small amounts invested for long periods of time grow to large sums. If you have the opportunity to contribute to a 401K at work and you are not contributing, start today! If you have a match from the company, at least contribute up to the match as the minimum contribution. If you do not have a retirement program at work, you can start one yourself. An IRA, Roth IRA, annuity, or even some life insurance policies can be used to build your retirement nest egg. If you do not feel you have the knowledge to make all the decisions yourself, there are many qualified financial professionals available to assist you. Hancock County Saves is a great way to get advice about the small changes you can make to create a big retirement. Hancock Savers have free access to a financial coach and other financial education workshops. Your financial coach can help you find money to save and help you decide how to get the most out of your 401K. Contact Angela Crist, Hancock County Saves program coordinator for more information at 419-422-3851. You Can Build Wealth! © Copyright 2003-2006 by Findlay Living™ and DynamiKComm, Inc. |
