June 21, 2013
I often run into people who realize how important it is to start saving for retirement, but have yet to start. Whether it's their company's 401k, the hospital/school district's 403b or just an Individual Retirement Account (IRA), they know it's available but just haven't started using it.
Here are a few advantages I point out to them to encourage them to get started ASAP:
When you put money into a tax deferred account, you get to keep more of what you earn. If your tax rate is 25% and you put $100 into your retirement account, it only costs you $75 out of your paycheck. You get a "free" $25 toward your retirement because that $100 is no longer taxable income. These tax advantages soften the blow in your paycheck, making it more affordable for you to save.
Next, let's take a look at the power of tax deferred growth. Here's a chart that compares two identical situations. We use the same amounts and the same expected returns. Look at how deferring taxes on investment gains will allow your savings to compound at a much faster rate over time.
*Before-tax and after-tax saving assumes a hypothetical investment of $250 a month, with annual returns of 8% compounded monthly and earnings reinvested. The after-tax illustration reflects the effects of an annual 25% federal tax.
The moral of the story is: Even though it can be difficult to save for retirement, especially when it might be decades away, remember how tax-deferral can help you build wealth and keep you motivated toward your long-term goals.
Chart Source: Putman Wealth Management
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).