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.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.