Can You Have Too Much?
It seems like there is always a naysayer telling you what not to do. You may have heard from someone, at sometime, that you should not save into a retirement plan because of taxation, lack of control, or a myriad of other objections that have only added to your worry, and ultimately further contributed to your procrastination to save.
Regardless, I will tell you that the day you retire “bigger buckets are better!” Not so you can be the richest, or have lots of toys, but so you can have more choices. So if you stop buying the new watches, cars, boats or whatever else gives you temporary gratification, and instead you save, tomorrow you can worry less, enjoy more and have more options.
Like I’ve said before, if everyone worked hard to be 20% more successful and gave half of that to charity we could change the world forever. So how can you be more successful? One of the biggest changes you can make is to participate in your retirement plan, especially if there’s matching money.
Let me explain. Picture the following:
• You’re 25
• You can save $200 a month
• You plan to retire at 65
• Your tax rate is 30% on income
• Your tax rate is 20% on growth
• You earn an investment return of 10% for over 40 years
Choice 1 = Okay
You invest $200 a month for 480 months in a taxable investment out of your take-home pay. You earn 10%, taxable at 20%, or an 8% net return. At 65 you have $702,856. If you continue to earn 10%, and withdraw 10% annually, you would have more than $56,000 a year in after-tax income, considering you pay 20% in taxes.
Choice 2 = Better
This time you decide to invest in a tax-deductible IRA. Because of the tax savings you are actually able to save $285.71 a month, with no additional impact to your spendable income. After saving for 480 months with a tax-deferred growth of 10% you have accumulated $1,821,937. Now since this considered ordinary income, you will be taxed at 30%, giving you $127,535 a year in income after taxes.
Choice 3 = Brilliant
In this scenario, you work at a company that offers a 401(k) and matches $1 for $1, every dollar you save up to an amount that is more than $200 a month. You can afford to save the same $285.71, since it’s tax-deferred. With the match you are really saving $571.42 a month. Considering a tax-deferred growth rate of 10% you would end up with $3,643,874 in retirement funds, providing you with an after-tax income of $255,071 a year.
You can argue that many things may go wrong. Regardless, you have the potential for 5x more wealth with the same sweat. You did not work harder, longer or suffer more. Because of better decisions, you end up with more choices, less worry, and more likelihood of achieving financial success. In “Wayne’s World” this also means you have increased ability to give back to the community or those in need.
Yes, I know there will be the naysayers out there that will say my math was wrong. Regardless, the reality is… the more you do right today and the sooner you make that decision, the more choices you’ll have tomorrow.
Bigger Buckets are Better!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This is a hypothetical example and is not representative of any specific investment. Your results may vary.
