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You’re in Safeway doing your weekly grocery shopping, and you spy a “buy 3, get 1 free” deal on your brand of toilet paper.
Being a smart shopper, you take advantage because after all – you’ll probably need more toilet paper, right?
But last week the offer was “buy 2, get 2 free.” If you’re out of toilet paper are you going to wait to see if the better deal comes back? (I hope not.)
And yet, that’s how many people think about their 401k (or 403b). “My employer doesn’t match, so it’s not worth putting money in.”
Admittedly, it’s a better deal if your company matches. But even if they don’t, you still get a “buy 3, get 1 free” deal on your retirement savings.
The “buy 3, get 1 free” deal is always available for your 401k – whether your employer matches or not.
The reason is simple – you don’t pay taxes on the money you put in your 401k (until much, much later).
Follow me with some simple math (promise it won’t hurt).
Example 1) You’re in the 25% tax bracket and you DON’T put money into a 401k. If you make $100,000, you give $25,000 to Uncle Sam, leaving $75,000 for yourself. (That wasn’t so bad, was it?)
Example 2) You’re still in the 25% tax bracket, but you DO put money into a 401k. If you make $100,000, you can put up to $18,000 in your 401k. If you do, you only pay taxes on $82,000.
Multiply that by 25%, and now only $20,500 is going down the drain…err…to Uncle Sam. You just kept $4,500 more in YOUR pocket (and out of Uncle Sam’s).
Still with me?
When you contribute $18,000 to your 401k, you’re only putting in $13,500 of money you would otherwise spend on lunch and vacations and toilet paper.
So it’s “Buy 3, get 1 free”….or really “Save $13,500, get $4500 free”.
Just like toilet paper, you know you’ll need money for retirement. Doesn’t it make sense to get the best deal you can on it?
P.S. I oversimplified the examples for proof of concept. Your actual “deal” will depend on your income and tax bracket. For most people it will be even better.
Disclosure: This is not a recommendation, and any decision regarding retirement savings should be discussed with your financial planner.