Free Money For Your Retirement

Free Money for Your Retirement?
It can be more than a​ little discouraging to​ start making retirement planning calculations .​
You’ll usually find that to​ achieve the​ annual retirement income you want,​ you need to​ be saving a​ lot more than is​ practical.
Suppose,​ for example,​ that you use a​ program like Quicken or​ Microsoft Money to​ determine that your retirement savings should equal to​ $5,​200 a​ year—which is​ the​ same as​ $450 a​ month .​
(This savings amount will produce roughly $15,​000 a​ year of​ retirement income if​ you save for 20 years,​ increase your savings with inflation,​ and earn 9 percent.)
Okay .​
That's great information to​ have .​
But practically speaking,​ where do you find this money? Well .​
first you want to​ get the​ free money that's available.
The first source of​ free retirement money
While $450 a​ month seems like a​ lot of​ money,​ you may be able to​ come up with this figure more readily than you might think .​
Say,​ for example,​ that you work for an​ employer who’s generous enough to​ match your 401(k) contributions by 50 percent .​
In other words,​ for every dollar you contribute,​ your employer contributes $.50.
In this case,​ you need to​ come up with $300 a​ month to​ have $450 a​ month added to​ your retirement savings .​
To make this calculation,​ you divide the​ monthly savings amount,​ $450,​ by 1 + the​ employer’s matching percentage,​ 50% .​
The formula $450/(1+50%) equals $300.
The second source of​ free retirement money
Also suppose that you pay federal and state income taxes of​ 33 percent and that you can deduct your 401(k) contributions from your income .​
In this case,​ the​ actual monthly out-of-pocket amount you need to​ come up with equals $200,​ not $450 .​
To make this calculation,​ you multiply your share of​ the​ needed monthly savings,​ $300 in​ this example,​ by 1minus the​ 33% marginal tax rate,​ which equals 67%
In this case,​ the​ actual amount you need to​ come up with on​ a​ monthly basis equals $200 because $300 times 67% equals (roughly) $200.
Sometimes,​ most of​ your retirement savings money can come from others
Admittedly,​ $200 a​ month is​ still a​ lot of​ money .​
But it’s also a​ lot less than the​ $450-per-month savings you need to​ add to​ your retirement savings .​
In fact,​ most of​ the​ money in​ this example you need to​ save comes from other sources!
The preceding calculations argue for two tactics when saving for retirement .​
First,​ if​ an​ employer offers to​ match your contributions to​ something like a​ 401(k) plan,​ it​ will almost always make sense to​ accept the​ offer—unless your employer is​ trying to​ force you to​ make an​ investment that is​ not appropriate for you.
TIP If you do want to​ contribute $300 a​ month to​ a​ 401(k) plan and need to​ reduce your income taxes withheld by $100 a​ month to​ do so,​ talk to​ your employer’s payroll department for instructions .​
You may need to​ file a​ new W-4 statement and increase the​ number of​ personal exemptions claimed.
Second,​ any time you get a​ tax deduction for contributing money to​ your retirement savings,​ it’s almost certainly too good a​ deal to​ pass up .​
As described in​ the​ preceding example,​ you can use the​ income tax savings because of​ the​ deduction to​ boost your savings so they provide for the​ desired level of​ retirement income.

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