Retirement Plans: Advantages of a retirement plan
Still on the fence about signing up for your employer's retirement plan? Here are a trio of reasons why taking the plunge may be a no-brainer, slam-dunk, can't-miss decision.
1. Compound earnings
Starting early can have a tremendous effect on the value of savings at retirement. Like a car that picks up speed as it rolls down a hill, the longer you are in the plan, the faster the retirement funds will grow. That's because of the advantages of compound earnings, which means earning more today on the contributions you earned yesterday. Early on, the value of compound earnings may be small. But like an acorn, they may potentiall produce a larger payoff several decades later.
2. Easy investing
An automatic pre-tax deduction from your paycheck lets you continually contribute to the retirement plan with little action on your part. And having periodic contributions helps you gradually build up retirement savings without having to make big financial sacrifices. For example, in the chart below you can see how a small decrease in your weekly pay can add up to substantial savings for retirement.
* This example is for illustrative purposes only. The assumed rate of return is hypothetical and does not represent the return of any particular investment option. Assume $30,000 in annual income, 35 years to retirement and an annual 8% rate of return. Chart assumptions do not take into consideration salary increases or cost of living adjustments. This example assumes a 25% tax bracket which includes federal, state and local taxes.
3. Pre-Tax Deferral
One of the key advantages of participating in a defined contribution plan is the ability to set aside part of your paycheck before taxes are withheld. This allows you to save a portion of your income and place it directly into the plan for your retirement.
The contributions you defer reduce your overall current taxable salary, providing you with the additional benefit of paying less tax per paycheck. Here's an example of how this works:
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