401k Contributions Not Enough - There Is Something Better You Can Do
Posted: Monday, July 13, 2009
by Michael G. Murphy
http://www.the4gospels.com
Thinking through your 401(k) can be pretty surprising. 401(k) is a descent program, but don't let that lead you into taking things for granted and not question the sufficiency of your account just because 401(k) has some good qualities.
The commonly understood benefit of the program is that you can contribute to your savings account pretax. That is, not only can you possibly get a larger paycheck today because you drop into a lower tax bracket, but you can also increase the amount you save because you are saving money that would have otherwise been the tax.
And so lets take a look at what you can expect your 401(k) to provide in the long-run. First, remember that the Federal yearly limit is currently $16,500.00. And to be honest, unless you are a highly compensated employee--one that makes $110,000.00 or more a year--you will not be able to put even that much away. You will probably be able to do a tenth of the Federal limit.
But for the sake of simplicity, lets consider your income is $50,000.00 a year. As such, to be able to put away $16,500.00, you would have to contribute 33% of your income. And let's be honest, not many people can live on 67% of their income.
Look at it this way: If your average salary is $50,000.00 a year, and you contribute 3% (which is a common amount), and assume that your company matches that, you will have $3,000.00 a year going into your 401(k). Take that, multiply it by 30 years, and you get a grand total of $90,000.00. Granted, you can earn interest on that money, but that is not guaranteed.
Understanding this, you can quickly conclude that you either have to increase your income dramatically, or you will have to find another source of savings in order to have a decent retirement.
With a $50,000.00 a year lifestyle, $90,000.00 will only last you a few years at the most. That is unless you have your house paid off--and that doesn't have to take 30 years.
Considering this, you can quickly see that you will need to plan on additional ways to assure a decent retirement. Having your house paid off is one way, but if you were to pay it off in a fraction of the time, think of the savings you could have.
Michael G. Murphy is the owner of Personancial Services , a company committed to helping individuals and families achieve financial freedom.
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