May 23, 2006

A Great 2 for 1 Sale

I heard a guy this morning say that something was simple, but it was not easy. That got me to thinking about financial security. Did you know that something like 30% of employees who could contribute to a 401K plan at their work don’t do so? Both Uncle Sam and the employer are trying to give these employees money and they won’t take it. That is amazing to me. The usual setup for a 401K plan is that the employee puts in some money before taxes are collected on that money and the employer matches all or a part of it. For instance, a very common arrangement is for the employee put in 6% of his salary and for the employer to match all or part of it, usually 3% to 6%. Let's create an example where the employee puts in 6% and the employer puts in a 4% match for a total of 10%. The typical household in America makes something like $44000 per year. In this case the family (if the $44k is their combined salaries), would contribute about $50 per week using a 6% figure. Because it is pretax money, the paycheck would probably only go down 85% of the $50 or $42.50 (just trust me). In addition, the employer has also kicked in 4%, about $34 each week. This family puts away $42.50 to get $84 a week, simple. This is where most people think that the “but not easy” part comes in. Our family has to figure out how to live on $42.50 less per week. You may have noticed that the real match for each dollar saved is another dollar, $42.50 + $34 = $86.50. I am guessing that almost any family can cut $42 per week from their spending or earn a replacement $42 per week in order to save, if they are serious about it. That $84 per week saved by a 25 year-old for 40 years would grow to $1.5 million at a 9% rate. For sure $1.5 mil in 40 years isn’t the same as $1.5 mil today, but it is still pretty good and is still more than nothing. So $42.00 saved x 52 weeks x 40 years = $88,400 in and $1,500,000 out. Yikes! My experience has been that if you take a small part of your pay and hide it in a pretax plan before you get it, saving is not only simple but it can also be easy. Tag:

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