Investing in your 401K is essential. I mentioned this before that everyone should be taking advantage of their 401K program at work. And I mean everyone! If you have a 401K program you may already know that it has many great advantages to offer.
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. The majority of employers will match .50 on every $1.00 of contribution 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.
These 4 examples definitely support the advantages of investing in your 401K program. 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 cannot 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 12% return as this is roughly what the S&P 500 has returned historically.
-Take the $1,440 contributed for 30 yrs at a 12% rate of return and you get $389,221.35. (Total contribution of $43,200 from your employer.)
-Now take the $389,221.35 and divide by 30. You get roughly $12,974
Your employer just gave you a $12,974 raise over 30 years. Add that to your $48,000 annual salary and your new salary is $60,974. I call this the delayed gratification raise! I'll take that raise all day long!
So in the end your 3% delayed raise from your employer turned out to actually be a 27% raise!
12,974/48,000 = .27 or 27% My suggestion to all is to go into work Monday morning and give yourself a 27% 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 a year.
That means over 30 yrs you were actually contributing $4,320 a year. Invest that number at 12% for 30 yrs. and you just became a Millionaire! It's that simple.
-Over 30 yrs you would have accumulated roughly $1,167,664.06
It's true everyone can become a Millionaire! The secret formula is a 401K + Time = Millionaire!
Happy Sunday!
Clay-
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