Pre-tax savings provided by employer retirement accounts is one of the easiest ways to start saving for retirement even if your finances are tight. In the example below I will show the benefits by comparing two individuals both earning the same salary of $25,000 a year.
* Based on 2004 single unmarried tax rates and does not take into account state and local taxes.
** Assumes a 100% match on first $500 and 50% match up to 3% of total salary.
As we see here, by taking advantage of contributing to the retirement plan the saver can save $2,000 on roughly $50 per bi-weekly paycheck. Not only that, but thanks to the pre-tax savings the total take home pay was only reduced by $1,063. Thanks to the pre-tax benefit and company match it only costs $0.53 to contribute $1 towards retirement savings!
Not all employer sponsored retirement plans are created equal, so your actual results may vary and this is a general example to show the power of pre-tax savings. Some employers do not offer a match at all, others match dollar for dollar on all contributions up to a certain percentage of earnings. The bottom line is that if your employer does offer a match, take advantage of it. That combined with the pre-tax saving will make saving for retirement painless even if you feel like you are unable to save.
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Filed Under: Personal Finance
About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.