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July 29, 2018, 9:42 a.m. EDT

This is the best way to save for retirement, spend less and lighten your tax load all in 1 fell swoop

Don’t want to think about saving for retirement? Just do this

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By Laurie


20thCentFox/Courtesy Everett Collection
Step one: get to work. Step two: start saving.

Personal finance can be overwhelming. There are so many steps, dos and don’ts, and behaviors to adopt. Once in a while it would be nice to have a fail-safe, simple solution to follow to make sure you have enough for retirement.

Maxing out your 401(k) is the single best way to save for retirement, lower your tax implications and spend less, all in one fell swoop.

Does it work for everyone? No. Like any “one size fits all” rule, there are those for whom it won’t fit. Some people don’t have access to a 401(k) (or its nonprofit sister, the 403(b). Some people want to spend too much in retirement to only save $18,000ish a year.

But for the vast majority of Americans who work in a job where they have access to a 401(k) , maxing out this retirement savings vehicle makes a lot of sense.

Let’s look at the math.

The hypothetical

We’ll take a hypothetical saver, Meredith. Meredith is fresh out of college, and is 22 years old. She has a new job where she earns $40,000 a year. She has access to a 401(k) and health care benefits. Let’s say she lives in New Hampshire, like me (that means she has no state taxes — good for her).

If she’s paid biweekly, then she’ll bring home $1538.46 gross. Let’s subtract $317.26 for federal taxes, Social Security, and Medicaid, and $50 for subsidized health care premiums (for a single person, the average would be $41.19 a paycheck. I rounded to $50).

That means, after taxes, she’ll bring home $1171.20.

What if she opts in, all in, for her 401(k)? She contributes $692.31 per paycheck, which should be allowed by her company as it’s less than 50% of her gross pay.

Because she’s lowered her federal tax implications by such a large amount, she’ll owe $213.41 in taxes, $50 in health care, and bring home $582.74.

Yes, that is about half of what she was making. And for most people, living on roughly $1150 a month would be very difficult. But, what if she could swing it? She finds a room to rent with some friends, pays $300 in rent per month, drives her beater car, and makes it work.

Eventually, she and her boyfriend get married, he starts working, they get raises , and their income rises to $100,000 combined a year. Let’s say, for the sake of our hypothetical argument, that he never contributes a dime to a 401(k). Meredith works for 40 years, and never saves more than $18,000 a year in her 401(k) (for simplicity’s sake). Also, her employer never gives her any type of match. And she never saves in any other vehicle. But she faithfully maxes out her plan each year.

If she works for 40 years and retires at age 62, then with a return rate of 5%, she will have accumulated $2,283,115.73.

That gives her family over $90,000 a year in living expenses, more than enough to retire on, since they’ve only been living on about $60,000 a year after taxes.

If Meredith only works for 30 years, and retires at age 52, then with a 6% rate of return, she’ll have accumulated $1,508,430.19 in her plan.

If she and her husband withdraw 4% a year , they’ll have just over $60,000 to live on a year. After taxes, that will be $48,640 a year, which they could supplement with a part-time job, her husband’s income, or eventually, Social Security.

The reality

But let’s face it. Most 22-year-olds aren’t going to max out their 401(k) accounts. They’re making too little, have student loans to pay, and are not thinking 40 years into their futures.

They’re thinking about paying off their debt , saving for a house down payment, or buying a new car .

But what if we try another scenario? What if Meredith starts contributing just 10% of her salary to her 401(k), and then each year, as she gets a raise , she ups her contribution by 2%?

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