Same Paycheck – More Retirement Savings

By Julie Lawrence, CFP®
Tampa, FL
http://www.lawrencefinancialplanning.com/

I am always amazed at the number of prospective clients who tell me they don’t contribute to their 401ks at work, often missing out on their company matching program. The first words out of my mouth are always, “if I can show you that your paycheck will stay about the same, will you contribute to your 401k?” Of course they usually say yes, and then I show them how this works.

For example let’s say your bi-weekly paycheck is $800 and your company matches up to 50% of your 401k contributions. If you are single, at this pay level you will fall in the 15% tax bracket. We’ll keep it simple and not worry about all the other deductions. I just want you to get the theory behind pre-tax deferrals to your 401k. This is you now:

Company Match $0
Pre-tax Deferral $0
Pay $800
Less federal taxes $104
Net Pay $696

Now let’s defer 1% of your pay into your 401k. This is $312 a year saved, but your paycheck only went down $182 a year.

Company Match $4
Pre-tax Deferral $8
Pay $792
Less federal taxes $103
Net Pay $689

Now let’s defer 3% of your pay into your 401k. This is $936 a year saved, but your paychecks only went down $520 a year; and look your taxes dropped too!

Company Match $12
Pre-tax Deferral $24
Pay $776
Less federal taxes $100
Net Pay $676

Now let’s defer 5% of your pay into your 401k. This is $1,560 a year saved, but your paychecks only went down $884 a year; and look your taxes dropped again!

Company Match $20
Pre-tax Deferral $40
Pay $760
Less federal taxes $98
Net Pay $662

I hope these examples encourage you to defer to your 401k and especially if you have a company matching program, do not walk away from free money!