Benefit of Saving $6,000

Feb 24, 2020 by

piggy bankDo you like math?

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

Save $6,000 in 2020—What’s the Benefit?

Let’s say you save $6,000 in 2020, 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 $6,000 for the next 40 years.

What’s your $6,000 become?

Answer: $62,000

By foregoing $6,000 of consumption in 2020 you’ll have an extra $62,000 to spend in retirement. You’ve just leveraged your $6k by 10x (or an “order of magnitude,” as we nerdy engineer types like to say).

Of course if that $6,000 (which happens to be the 2019 IRA contribution limit) were a tax deductible IRA contribution, you’d also save $900 on your 2019 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 $6,000 Every Year for 40 Years—What’s the Benefit?

Okay, so far we’ve looked at just a one-time $6,000 savings deposit.

What if you saved $6,000 every year for 40 years and earned an average of 6% on your money?

$6,000 x 40 years = $240,000 of current consumption you will have given up. But how much is in your nest egg?

Answer: $929,000

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? 🙂

Related Posts

Share This

Leave a Reply

Your email address will not be published. Required fields are marked *