Are you struggling with giving up part of your paycheck today in order to fund your retirement? Often, we obscure retirement terms like tax-deferred, percentages, matching contributions, etc. let’s add some hypothetical examples to help clarify. I used RetireReady Solutions’ Paycheck Calculator and related Retirement Projections. They provide software for financial professionals to work with their clients on retirement and financial wellness.
Let’s say that you are a single, 30-year-old, living in the state of Illinois. You get paid every two weeks. You plan to retire at your Social Security Full Retirement Age of 67. The following table shows the amount of money you would save at savings rates of 3%, 6% and 9% in tax deferred accounts.
Dollar savings per paycheck from various savings rates
|Annual income||Bi-weekly paychecks||3% savings||6% savings||9% savings|
For example, if you make $4000 per paycheck, these increasing percentages equate to $120, $240 and $360 per paycheck. Too often the conversation is around percentages and not on the dollar amounts that are being saved. Further, the conversation often turns to getting the free money from your employer rather than what is the effect on your future retirement which will quickly address.
Note that the maximum for an IRA for a 30-year-old stands at $6000, so you may not be able to save the amounts below unless you are in a 401(k) which has a limit of $19,000 in 2019 for 30-year-old. If you have a 401(k) that provides a 100% match up to 3% of income, often called Safe Harbor, then simply by saving 3% and getting the match you would get 6% without sacrificing 3% more of your cash. Some have told me that they thought the 3% match was what limited their savings. Not true. You can save up to $19,000 in 2019. With that knowledge, what if you saved 6% and got a 3% match for a total of 9%? You’ll see why you may want to do that in the last table.