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How Much Is A Penny Saved Worth To You?

July 19, 2017
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If you are not participating in employer-sponsored retirement plan, you could be leaving "pennies", or much more, on the table.  For over a decade we have worked with retired executives from multi-million dollar companies who sometimes miss out on their employer’s full match.  Additionally, many of the same executives have stated a majority of their employees contributed something to their retirement, but weren’t always taking advantage of the full matching contribution in their retirement plan.

Defined Contribution plans, more commonly known as retirement plans were created by the IRS and adopted by employers as a means of deferring compensation to employees.  A retirement plan takes a percentage of your pay and defers it by directing it into a specified account rather than receiving it as direct pay today. Then at age 59.5 you can begin to withdraw money from that account.  The withdrawal is considered income and is taxed at your then current rate. Deferring compensation with a retirement plan offers the potential for saving and growing your money in three possible ways:

  1. The funds you contribute out of your paycheck are tax deferred and may reduce your income tax liability. 
  1. Many retirement plans offer a tax deferred employer contribution.
  2. Many retirement plans offer diverse investment choices: a money market, mutual funds, individual stocks etc.

Each of these possibilities saves AND earns you money. All three could equal huge benefits in the long run.

There are several types of defined contribution plans:

  • 401(k),
  • 403(b),
  • 457,
  • 409A,
  • Thrift Savings Plan (TSP).

We strongly encourage you to familiarize yourself with the type or types of plans your employer offers, and then be sure to consult a professional planner to see that you are maximizing your contribution in the plan to meet your future goals.

Money Earning Money

I’m sure you’ve heard all the old sayings:

  • penny saved is a penny earned
  • penny is a lot of money, if you have not got a penny.
  • Mind your pennies and your dollars will take care of themselves.

The reason these sayings are applicable is due to a small thing called compound interest, or in other words, growth.  This is the basic principal of money earning money on itself over time through interest rather than it being paid out to you in your paycheck each month.  The interest is based on the previous principal, and then the following month the new principal is the original principal plus the interest accrued the prior month.

For example:

Amount saved:            $0.01 per day

Number of days:          365 days/year

Percentage Earned:     6.0% APY (compounded monthly)

Value after 1 Year:        $3.75

Now imagine your pay is $50,000 per year and your employer is willing to contribute $0.03 for every dollar you earn.  All you have to do to receive this is contribute the same amount of $0.03 per dollar you earn into the company's defined contribution plan:

Matching Contribution:  $125.00 per month

Number of months:         12 per year for 25 years

Percentage Earned:        6.0% APY (compounded monthly)

Value at 25 Years:           $86,624.25

This $86,624.25 is what you are potentially stepping over or leaving on the table by not participating.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.  The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Investing involves risk including loss of principal.

This material was created for educational and general informational purposes only.  The opinions voiced in this material are not intended to provide specific advice or recommendations for any individual regarding tax, legal or investment advice.