Imagine you make $40,000 annually working for a corporation that offered dollar-for-dollar matching on contributions up to the first 4.5% of salary. You are in the 28% tax bracket. To save $10,000 is going to be far easier than you think because you are dealing with a number of variables that are often not obvious. Let me illustrate.
Say you saved 20% of your income and had it put into your 401k, amounting to $8,000 each year. This one move will result in a savings of $2,240 on your tax bill, plus $1,800 in company matching will be deposited into your account ($40,000 x 4.5% = $1,800.) By investing the $8,000, you’re already $4,040 wealthier; that’s a 50%+ return on your money without taking any risk simply because you were empowered by having knowledge of the tax laws! At the end of the year, your 401k would have $9,800 added to it. If, instead, you chose not to invest in your 401k, you would take home an extra $5,120 in your paycheck after income taxes, payroll taxes, etc. But ask yourself which you would rather have: An extra $5,120 in your paycheck each year - $197 per bi-weekly paycheck - or $9,800 deposited into an account that can grow tax-deferred for decades?
The answer isn’t difficult. Were you to start this course of action at 25 years old and maintain it until you were 65, at a 10% compound annual rate of return, you would retire with over $4,337,000 in your 401k. That’s not a joke, nor is it a typo.
(Side note: There has been quite a bit of discussion about the 10% rate of return assumption. You can read an explanation of the mathematics here.)
Resources to Help You Get StartedNow that you’ve seen the light, check out these great resources, articles, tips, and lessons to help you start on the path to wealth.