How you pay by cutting back on your 401(k). Find a written summary of today's show at BIGGSUCCESS.COM.
The BIGG Successs Show
I Need Money! Should I Cut Back on My Retirement Plan Contributions?
Welcome to The Big Success Show. Today, we'll talk about how you pay when you cut back on your 401(k) The Big Success Show with George and Mary Lynn. Mary Lynn, I think I've heard the word perfect storm used more recently than when the movie was out. You know, I mean, it's here in the United States, obviously we're facing what many are describing as this perfect storm. Rising costs, falling home prices, volatile stock market, this whole subcrime mortgage mess, subprime mortgage mess. - Some did commit a crime, I think. - That's what they're saying, right? - And, you know, talk of a possible recession. - And recently we talked about the ways you pay when you cash out of your 401(k) to try and get some money now. And we talked about how that's the worst thing you can do. Well, today we wanna talk about cutting back. - Yeah, and if you follow the data, Mary Lynn, it's interesting to me that two to three months ago, it seemed like this wasn't even an issue. People were holding very firm, and now you have to say the overwhelming majority of the people are still just locked tight. Let's just keep going. But you are starting to see more evidence that people are putting it on the table. It's a point of discussion. And they are starting to consider cutting back on their 401(k) contribution. - And I think that it's very understandable to be considering that. I mean, geez, just the other day, I received a notice in the mail that my insurance was going up 20 bucks. You think about people are dealing with rental increases, mortgage increases, you know, tax increases. - Grocery bills are higher. - Gas is higher. So when, you know, you're getting nickeled and dined everywhere else, of course you wanna try and find options where you can add some more money to your paycheck. And by cutting back on your 401(k), you can do that. - Well, and there's three reasons why, because of the nature retirement plans, there's three reasons why you don't want to do this if you can possibly help it. And the first one is that you're making your contributions with pre-tax dollars. For example, let's just say that you're in the 30% tax bracket and you've been contributing $1,000 a year. Now you decide I'm gonna stop doing that, okay? - I'm gonna completely stop contributing. - That's right. No more contributions at all. Well, so you think in your mind, okay, that means that over the course of the year, I'm gonna get $1,000 more in my check, right? - That makes sense, but here's the problem. You're gonna owe $300 in taxes. So the net effect isn't-- - For 1,000. - For 1,000, right. And so the net effect isn't 700, or isn't 1,000, it's only 700. There's a real strong encouragement for you to make your retirement savings through a retirement plan. - The next reason why you shouldn't cut back on your retirement plan is that those plans accumulate money tax deferred. So as you said, George, when we were talking about this last time, it's money that's compounding upon money that's compounding upon money. - That's right. - And so obviously the more money you put in, the more money you're compounding upon. - That's right, and rather than getting taxed every year on it, you just keep growing that higher amount of money and it makes huge differences when you look at it over a period of years. - And the next reason that you shouldn't cut back from your retirement plan is the employer match. Now employers will match anywhere from 50 to 100% up to some limit. - That's right, and just say you contribute, let's say 3% of your salary and for that, your employer would match 100%. Now if that's the case, it's like having found money, right? I mean, your employers in a sense, guaranteeing you a 100% a year return on your money 'cause they're going to invest every dollar that you invest. - Now granted, this is part of your compensation package. You are earning this money from your employer. - That's true, but the thing is, Marylin, if we think about it, we often think of our tax refunds as found money, well this is really found money because they actually are investing money for you. - Coming up, we're gonna share an example of how cutting back can cost you in the future. - Today we're talking about tough times and some of the decisions that we have to make and we're talking specifically, should you cut back on your 401(k). - So we wanna share an example of how that can actually cost you. So for this example, we're gonna use a 30 year old female and she is not going to make any contributions to her 401(k) for three years. And then after those three years, she'll start investing again. - Yeah, and so we assume that this fictional 30 year old would have invested 3% of her $50,000 a year salary, right? Her employer matches 100%. Well, if she let that money ride, that she would have invested over these three years when she retires at 62, if she earned 6% on that money, this small $125 monthly investment would have accumulated to $54,000 and she's only done it for three years. - Wow, so by not investing $125 a month now for only three years, which would only cost her $4,500. - That's right. - In the end, costs her nearly $54,000 which is over one year salary when she retires. - That's absolutely right. - That small amount of money now makes a huge difference in the long term. Now, if you absolutely, positively have to find a place to cut back, as we said, this isn't as bad as pulling money out, but try to at least keep investing the amount that your employer matches because you're getting just an amazing boost in your portfolio by hitting that target. - You can find a written summary of today's show on our site at Big Success, that's bigwith2gsuccess.com. You'll also find a link to the show where we talked about why it's not good to pull out of your 401(k). - Next time, we'll talk about how to get more done by planning to do less. - Until then, here's to your big success. - The Big Success Show at BIGGSuccess.com. (upbeat music) (chimes)