Straight-Up Martini with a Retirement Twist

Skip the Drink and Retire in Style
By Michael Dubrow

Straight-Up Martini with a Retirement Twist
December 8, 2014

“Experience is the name we give to our mistakes.”
— Oscar Wilde

If the venerable Mr. Wilde was right, I’m filthy rich with experience. Especially when it comes to investing. In real estate alone, I’ve lost so much money that my wife no longer calls me an investor. She says I’m a real estate philanthropist.

Sadly, it appears I’m in good company. In a recent MoneyTips survey of Baby Boomers, it was revealed that many are heading for a financial trainwreck. One-in-three Boomers have NO financial plan whatsoever, while four-in-ten aren’t saving enough to meet their retirement goals. Sounds like a lot of great experience is being garnered out there, but not enough wealth for a secure future.

Which brings me to the lofty purpose of today’s post: exposing for my gentle readers the worst financial planning mistake (I mean experience) of our era — the failure to participate in your employer-sponsored retirement plan. By considering this misstep now, while there is time to adjust one’s future course, it is hoped you can snatch a cozy retirement from the jaws of impending destitution.

But first, let’s get real: saving for the future is hard. Education expense (repaying yours and funding your kids’), housing, transportation, food and other living costs — plus the bona fide need to have some fun along the way — leave scant room in the family budget for retirement saving. That’s why it is vital to exploit both government and employer largesse at every opportunity.

Let’s start with your company-sponsored retirement plan, as 80% of full-time workers in the US have access to one (source: American Benefits Council). The main kinds — 401(k), 403(b), and Thrift Savings plans — feature the twin-angels of pre-tax investing and employer matching. To keep things simple here, we’ll call them all 401(k)s.

If your gross annual income is $60,000, you’ll typically pay 30% of that in federal and state income taxes. If you contribute five grand to your 401(k), you’ve reduced your combined tax bill by $1,500. That’s $1,500 stashed for retirement, courtesy of your tender-hearted government.

But wait, there’s more! Your employer will typically match 50% of your contribution, up to 6% of pay. This boosts your total contribution for the year to $7,500 — with only $3,500 lifted from your post-tax pocket. That’s just $292 per month…or two Mocha Frappuccinos per day.

Better still, this money compounds untaxed until withdrawal. If that’s in 30 years, and you earn a 6% annual return, your total contribution of $7,500 will grow to over $43,000. (FYI, stocks have returned 9% annually, on average, since 1964.)

Now consider the magic of repeating this process for 30 years. At a 6% compound return, your 401(k) grows to $628,000 for the price of two Mocha Fraps — or a single well martini — each day! Want to grow your nest egg to a cool million? Simply boost your contribution by another grand or so each year, while reducing your intake of java, or joy juice, to suit.

The beauty of a 401(k) is that, for most Americans, over half their total contribution is subsidized by employer matching and tax savings. Consequently, no other retirement planning strategy comes close to delivering the bang for the buck of your 401(k). Better still, payroll deduction and multiple investment choices within your plan make it effortless to participate. It’s simply too good a deal to ignore — so don’t.

You say you don’t have 30 years to build this nest egg? OK. Say you are 55, and plan to work until age 70. At this point in life, you’re probably earning more than when you were younger. Let’s assume you earn a $100,000 salary. The government allows you to “catch up” by contributing as much as $24,000 to your 401(k) on a pre-tax basis every year until full retirement. If you pay a combined 35% in federal and state taxes, this means the government is contributing over $8,000 annually to your retirement kitty!

Plus, many employers will match this contribution by another $6K, bringing your total “catch up” investment to $30,000 per year. If you maintain this approach for 15 years — and earn a 6% compound return — your 401(k) or similar plan will be worth over $700,000 when you turn 70. There may not be a yacht in your future, but this money will go a long way towards supplementing your social security benefits — if you take advantage of the program.

And that, of course, is the key to this whole enchilada: making regular contributions to your 401(k) as early in the game as possible, or late in the game as necessary. Unfortunately, too many Americans are missing the 401(k) boat. The US Labor Department reports that 30% of eligible employees — and half of those age 34 and younger— fail to participate in their plans at all.

Whatever your situation, don’t fail to exploit this game-changing opportunity. Doing so would be the greatest investing mistake of our era — an experience you’d be wise to avoid.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

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