Double Your Retirement Savings With Free Cash

If a representative from a reputable company knocked on your door and offered you $1000, tax free, with absolutely no strings attached, would you take it? How about tens or hundreds of thousands?

The majority of lucky recipients would gladly accept this financial gift if there were truly no strings attached.

Yet some of those same happy recipients would refuse to enroll in their employer sponsored retirement plan. This is equivalent to throwing away tens or even hundreds of thousands of dollars of absolutely free money over their career.

If you’re not enrolled in your retirement plan yet it’s not your fault.

Not all companies do a great job of communicating the incredible benefits of company matching funds, and the overall tax advantages of 401Ks.

Perhaps you haven’t had the chance to do an analysis of what it would mean to you in real dollars.

Or maybe you have competing financial priorities. That’s okay.

But once the benefits are clear and concrete, you’ll understand how much you’ll lose if you pass on what is 100% free money.

Free retirement cash comes from three primary sources: employer match, tax free asset appreciation, and pretax contributions.

Employer matching is where your company will match a stated percentage of your retirement savings contributions. It’s free money, and it’s even more powerful than it looks because it isn’t taxed.

Assuming a tax rate of 30%, a 2.9% raise nets only 2%. But if your company matches 100% of the first 6% of your contributions, you keep the entire 6%.

In this example, employer match is like a 6% raise with zero negotiation and no performance review.

It then goes on to earn returns which are also tax free until you begin withdraws in retirement, and then just the withdrawn dollars are taxed while the balance continues to grow tax free.

This combination of free money from your company that grows and compounds, and a delay in taxes on both on both employer match and total investment gains until retirement, are both powerful tools for growing your retirement savings.

The third major benefit is that your contributions come out of your pay prior to taxes. This means you get to boost your retirement savings with a lot less pain.

Depending on your total tax burden (federal + state + local), instead of getting one dollar of take home pay, your retirement savings account jumps by an amount between $1.43 and $1.67.

This means that you get between 43% and 67% more out of the dollar that you would have taken home.

Not only that, but by having it go into retirement savings automatically, you eliminate the temptation to spend that dollar. And it goes on to throw off earnings for years or decades to come.

Here’s an example of the power of placing your money in a typical retirement account:

This analysis shows the massive benefit of employer sponsored retirement savings accounts.

The assumptions are a current $75,000 salary, 2% annual raises, a total tax rate of 37%, 7% annual returns, and 100% employer match of the employee’s first 6% of contributions. All very middle-of-the-road assumptions.

But what isn’t average is the difference in the savings balance at 25 years in comparing a standard savings account to a tax advantaged retirement account.

What’s better, $400,000 or $1,000,000?

Even though you will be taxed on what you withdraw in retirement from the $1,000,000 balance, it will likely be at a much lower rate, like 20%, taking the ‘value’ of the $1,000,000 down to $800,000.

Which is still double of the amount you would have if you didn’t take advantage of an employer sponsored retirement savings plan.

See how hard free retirement cash can work for you? That extra $400,000 can make a massive difference in how you’ll enjoy the final phase of your life.

And it takes absolutely no additional sacrifice or work on your part. It’s the easiest $400,000 you’ll ever make!

But not everyone will be motivated to act by numbers on a page. The reason is that we are mostly emotional creatures. We aren’t always driven to action just by analysis.

So there is another important perspective to consider beyond a spreadsheet. This involves really thinking through what those dollars will mean to you in retirement.

The biggest fear of future retirees is running out of money in retirement.

It isn’t that they are so concerned about cash itself, but instead they are worried about being forced to live at a deeply lower standard.

Your retirement savings represent your insurance policy to realize your dreams for how you’d like to spend the final years of your life.

Where you’d like to live.

How you’d like to spend your time.

Where you’d like to travel and what you’d like to see.

The degree to which you want to help your kids, family members, friends, or charities.

The chance to enjoy the deep peace of mind that financial security provides.

Each of these dreams are brought to life by the cash you’ve saved and income streams you’ve secured ahead of retirement. Save enough and your dreams can come true. Your golden years may then be the best of your life.

Save too little and you may be denied many or all of your retirement dreams, making the final phase of your life miserable and frightening.

And regrettably, there are no do-overs.

Once retirement day comes – and you may be forced to retire sooner than you expect – your financial future is locked in, for better or worse.

Free money can play a major role in your retirement preparedness. Every dollar you forego can never be recovered. And that free money can be the difference between an okay and great retirement. Free money is the easiest dollars you’ll ever grab for retirement.

Not only that, but free money will bolster your efforts to prepare for your retirement early and automatically.

The bottom line: don’t miss out the chance to double your retirement savings with free retirement cash. If you do, you will live to regret it.

⇒Next: 6. Don’t Mortgage Your Future