I had a fascinating discussion with someone this week, and I just had to share it with you…
A guy I know had worked in banking for over 30 years. He rose to the level of a branch manager, earning a six-figure income.
The bank offered a retirement plan that employees could contribute to before taxes. He did not remember the type of account it was, but it was paying around 8% at the time. The instrument did not require picking a stock or mutual fund. To this day, he couldn’t tell me what it was.
The bank went through a transition, and he was let go. At the time, he had a balance of $20,000 in the retirement plan. He was asked if he wanted to leave it invested, or take the cash. He chose to take the cash, and thought that he took all of it.
20 years pass by, and he starts to receive letters from his previous employer that he has money in his account.
He ignored these letters, thinking it had to be a mistake. He thought he’d withdrawn all of that money.
One day, tired of being harassed by the bank, he decided to pay one of their branches a visit. It turned out that he had withdrawn all the funds in the account except $100. And over the past 20 years, that $100 balance had grown to $5000!
He was shocked, and pretty much kicked himself all the way home. That was 50 times his money! If he had not touched a dime of the original investment, he would be sitting on $1,000,000 today!
What he told me is that he didn’t understand investments and how compound interest worked. Had he known, he said, he would have left the money alone.
Compound interest is very basic. I explain it in The Stock Market is For Everyone. For some reason, people have a hard time wrapping their mind around the concept.
Albert Einstein called compound interest the most powerful force in the universe. This is true – but you’ll only be able to make it work for you if you understand it!
* The Stock Market is For Everyone, Eric Milton’s short guide to stock market investing for beginners, is available in e-bookandpaperbackformats. If you like what you see on this blog, we hope you’ll take a moment to purchase and read the book, let us know what you think via a blog comment or Amazon review, and share this information with others! Thank you. *
Hi, all! Chris Pascale is here with us once again as a guest poster. Tonight he’s going to share about maxing out your company’s retirement account match.
The Magic of a Company Match
By: Christopher Pascale
I work for the federal government. So long as I do, I can contribute to a Thrift Savings Plan (TSP), which is like a 401(k), or a 403(b), but for federal employees.
A major benefit is that the government will match up to 5% of my pay. As such, I’d never put in less. If you have a company match, you must – at the very least – max it out. The main reason is because the match provides a 100% gain upon deposit. By not doing so, you’re taking a pay cut, which will be discussed at the end of this piece.
100% Gain on Day 1
If you have a company match, but aren’t taking it, you’re losing a 100% gain over a period of zero minutes.
So many investment professionals will tout the magic of compound interest – how they can double your money every 10 years with investments that will grow 7% or 8%. By using the company match, you’ll double your investment not in 10 years, but in zero minutes. It doubles right off the bat.
Maxing Out Tax Savings
I’m not going to get into the intricacies of paying no taxes in old age. What I will do is explain how by saving for your future, you can pay less taxes today.
This is a simplified example, so bear with me. Let’s say you earn $80,000, and are in the 25% tax bracket (there’s no 25% tax bracket right now, but there was one, and could be again).
If 25% of your $80k income was taxed, you’d pay $20k in taxes. By participating in a matching program like mine, you’d invest 5%, or $4,000, which is then matched with another $4,000.
Along with having $8,000 put into your retirement account, you will now pay taxes on $76k instead of $80k.
That means you’ll pay $1,000 less in taxes while getting $4,000 extra!
Can Federal Employees Retire Millionaires?
In 35 years with the federal government (if you made $80k and never got a raise), you’d have contributed only $140,000 of your own pay, but your matched TSP would grow to about $1,200,000.
On top of that you’d have saved $35,000 in income taxes, as well.
This doesn’t account for federal employees’ traditional pensions, nor their Social Security payments.
Negative Reasons to Max Out Your Match
If good reasons were good enough in this life, people wouldn’t smoke, vape, or acquire trivia about the Kardashians (how can Rob put up with Blac Chyna, amirite?!?!). Instead, they’d be reading good books (like mine!) and taking the stairs instead of the elevator once in a while.
I’ve told you some good reasons to max out your match, but there are some awful ones, too.
One of them is that monetary and farming policies are simply awful for the value of our currency. For the good milk (from nourished cows instead of poisoned ones), it’s $5.99 for a half-gallon. And honestly, once you’ve had an organic strawberry, the other red globules sold in the produce section taste like re-packaged garbage. And don’t get me started on Sockeye versus farmed salmon!
Also, interest rates are going to rise. This is shitty for people with no money, because borrowing will cost more. But it’s great for people with money, because savings will be rewarded.
Lastly…it’s a part of your pay! You’re actually giving yourself a pay cut if you don’t take the company match. If it’s 1%, then you’re volunteering to take a 1% pay cut. If it’s 5% like mine, that’s about $3,500 of my pay I’d be letting the government keep.
Am I so rich that I can just let the government keep $3,500 of MY MONEY for things like studying the benefits of genital washing? Spoiler alert…I’m not! And I have about half a dozen sources of income between military pensions, teaching college courses, and cockeyed schemes I get myself into that sometimes even make money – like writing!
If I can’t afford to take the pay cut of not maxing out my match, then you can’t, either!
Your future can be bright, but only if you let the light in. There are outside forces working against you, but that’s not what is going to hurt you – in the USA. What is going to hurt you are the internal forces you can control.
Take the company match. End of discussion.
Christopher Pascale is an author, accountant and adjunct professor from Long Island. He is the former CFO of Portfolios with Purpose, and is a current member of the IRS’ Office of the Chief Counsel.
My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.
Click the image of the book at left to be taken to its Amazon page. (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)