A Positive Spin On Your 401K

A Positive Spin On Your 401K

I had a recent conversation regarding the fact that many people aren't taking advantage of their employers 401K program.  This is very shocking to me as it's one of the easiest ways to add additional money to your retirement.  I decided to go back and update the original article I posted back in 2010.  The numbers are updated to reflect the current investing landscape.  Enjoy!

Investing in your 401K is essential.  Everyone should be taking advantage of their 401K program at work. And I mean everyone!  If you have a 401K program you already know that it has many great advantages.

1. Tax deferred.  You don't have to pay taxes on your contributions until you retire.

2. 401K reduces your taxable income.  This could potentially put you in a lower tax bracket. 

3. Employer Match.  Many employers offer a match to your contribution.  An example would be .50 on every $1.00 you contribute up to 6% of your annual salary. (Plans may vary)

4. 401K money comes right out of your check.  You never see the money and its a great way to force yourself to invest for your future.

Those 4 examples are reasons to take advantage of your 401K.  I would like to add another advantage that is straight up mind blowing! (The only catch is your employer must match your contributions)

Investing in your 401K is essentially a hidden raise from your employer.  Everyone wants a raise.  Right?  Here is a perfect opportunity for a raise and you don't even have to be a standout employee at your work.  I will explain. Get ready!

 Example:

 -Your current salary is $48,000 and your employer matches .50 for every $1.00 up to 6% of your annual salary. 

 - 6% of your salary is $2,880.  That means your employer will contribute up to $1,440 a year. 

 -Add that $1,440 to your $48,000 and you just received a 3% raise.  That's the easiest 3% you will ever earn.

You may argue that you are decreasing your annual income by $2,880 since that is what you must contribute to take advantage of the match from your employer.  You are correct!  The raise is being deposited into your retirement account.  Your technically not losing any money.  You are moving your money to an account that shouldn’t be used until retirement.  You are getting a raise that has delayed gratification written all over it! Now check out these numbers!  The numbers below provide the evidence behind a once in a lifetime raise.  A phenomenal deal by your employer that you can't refuse!

-Next we will take the $1,440 that your employer matched from your $2,880 contribution and invest it in the stock market for 30 yrs. (You could have multiple employers over the 30 yrs)

-I like to use a 9% return as this is roughly what the S&P 500 has returned historically.

-Take the $1,440 contributed for 30 yrs at a 9% rate of return and you get $213,948.31.  (Total contribution of $43,200 from your employer.) 

-Now take the $213,948.31 and divide by 30.  You get roughly $7,131.

Your employer just gave you a $7,131 raise over 30 years.  Add that to your $48,000 annual salary and your new salary is $55,131.  I call this the delayed gratification raise! I'll take that raise all day long!

In the end your 3% delayed raise from your employer turned out to be a 14.85% raise

$7,131/$48,000 = .1485 or 14.85% My suggestion to all is to go into work Monday morning and give yourself a 14.85% delayed gratification raise.  You deserve it! 

I'm not done just yet.  While your employer was contributing $1,440 you were also putting in $2,880 ($7.89 a day) a year.

That means over 30 yrs your total contributions would be $4,320 a year.  Invest that number at 9% for 30 yrs. and you will have accumulated roughly $641,844.94! It's that simple.

That’s a nice chunk of change for taking advantage of an employer’s match.  Along the path of 30 years I would expect you would be adding value to your employer in return for additional compensation.  That would change the math and the $641,844.94 would be the low end of the range for retirement.  With compound interest on your side there is great potential for higher returns. 

A 9% return seems conservative compared to the recent returns in the market, but I also want everyone to have a realistic retirement.  It all depends on what window of history you wish to choose to get your information.  Over the past 5 years the S&P 500 has returned roughly 14.50%.  If you used the same math as above, you will have accumulated $1,947,805.58.  I don’t anticipate those returns to continue, but as you can see it’s a substantially different outcome.  The point is to start early and invest for your future.  Eventually your money will be working for you!

Happy Investing!

Clay-$$$

Questions-feel free to send an email to wheatleycsmk@gmail.com

I'm not a licensed financial advisor. All recommendations is strictly my personal opinion and the information is intended for learning purposes only. Invest at your own risk!