Assuming that your have access to a 401K, 403b, a “Simple IRA” or a or a SOLO 401K, stuff money in that account and the government will pay back 24% of what you save! How is this possible?
The government pays you to save!
Lets say for a moment that you make $90,000 a year and your employer has a Simple IRA. You want to be a millionaire so you’ve been putting away $503 a month since graduation ($6,036 / year). Since you make $90K you are in the 24% tax bracket. By putting $6K into your IRA, your taxable income has decreased to $84,000 and you your taxes have decreased by $1,448.64. You put $6,036/year in your retirement plan but the government actually paid for almost 25% of it. Your annual retirement savings actually only cost $4,588 because of decreased taxes.
Employer matching plans
If your employer offers any form of matching – you would be crazy to not contribute at least as much as your employer will match. Lets look at how this works. You make $90,000 a year and your employer Simple IRA matches up to 3%. This means that for every dollar you put into your retirement plan, your employer will match that dollar until the total is 3% of your income. So, you contribute $503 a month ($6,036 /year) to your Simple IRA (which is $4,588 after taxes) AND your employer kicks in another $2,700 a year (3% of 90k). The effect of an additional $2,700/year earning 6% over the course of a career could easily result in an additional $448,000 at retirement! Looking at ther chart below, we see the after tax cost of your retirement contribution over a career of 40 years was only $183,520 (blue line) and when you retire you have almost 1.5 million dollars (red line). So who doesn’t wants to have 1.5 million dollars!