Benefit of Saving $5,500

Nov 23, 2015 by

piggy bankDo you like math?

Regardless of your answer, stick with me for a minute.

Save $5,500 in 2016—What’s the Benefit?

Let’s say you save $5,500 in 2016, and you’re young enough that you’ve never used a paper road map.

Now let’s say you earn an average of 6% per year on that $5,500 for the next 40 years.

What’s your $5,500 become?

Answer: $57,000

By foregoing $5,500 of consumption in 2016 you’ll have an extra $57,000 to spend in retirement. You’ve just leveraged your $5.5k by 10x (or an “order of magnitude,” as we nerdy engineer types like to say).

Of course if that $5,500 (which happens to be the 2016 IRA contribution limit) were a tax deductible IRA contribution, you’d also save $825 on your 2016 income tax bill, if you’re in the 15% tax bracket. But let’s keep things simple and ignore that very real benefit for now.

Save $5,500 Every Year for 40 Years—What’s the Benefit?

Okay, so far we’ve looked at just a one-time $5,500 savings deposit.

What if you saved $5,500 every year for 40 years and earned an average of 6% on your money?

$5,500 x 40 years = $220,000 of current consumption you will have given up. But how much is in your nest egg?

Answer: $851,000

That’s right—you’re within hailing distance of a million dollar nest egg in 40 years. And thanks to that 6% annual return, you have about four times more cash to spend in retirement than you pulled out of your income to save over those 40 years.*

The Takeaway

Doesn’t this read like a better deal than depending on a lottery win to pay for your retirement? 🙂

*If you’d been making $5,500 deductible IRA contributions and were in the 15% tax bracket all along, you’d have ‘sacrificed’ only about $187,000—not $220,000—in consumption over your 40 years. Uncle Sam would underwrite the difference. Of course you’d pay income tax on your IRA withdrawals, but your tax bracket may be lower.

Digiprove sealCopyright secured by Digiprove © 2015-2017 Kurt Fischer
All original content on these pages is fingerprinted and certified by Digiprove