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Wine Tasting, Retirement and 401Ks

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March 31, 2016

Wine Tasting, Retirement and 401Ks

Author: Nick Pagano

Topics: Family, Gainplan Facts, Industry Ideas

We hosted a charity wine tasting this weekend, and in the course of the evening I got into a conversation with the CFO of a large, privately held company about some of his plans for retirement. In the course of the conversation, he shared a sobering thought - he’s going to be fine but MOST of his employees will not.  Inquiring further, he explained that most of his employees have done nothing to save for retirement. Those who have saved relied solely on their 401ks; which will not be enough to carry them through their retirement years. As we discussed it further, one fact kept resonating - those that are participating in the plan are not taking full advantage of it; and as a result they are not getting the full benefits.

This is a microcosm of the national problem. Baby boomers are the first generation that are responsible for their retirement. The 401k began in the early 80’s partially as a result of corporations getting rid of their pension plans for employees. Anyone familiar with the time value of money knows that even small amounts, when compounded over long periods, can result in thousands or even millions of dollars in additional wealth. This simple truth is one of the reasons we so strongly recommend tax-advantaged accounts and investments such as IRAs, 401k’s, 403b’s, 457b’s, 401a’s, etc. In the past, these decisions were not as crucial because of the prevalence of defined-benefit pension plans. Today, pensions are going by the wayside at many U.S. firms. Instead, most of today’s workforce is likely to find their retirement years funded by the proceeds of these 401k and other retirement plans. 

Let’s take a quick look at the numbers. If you contribute $10k/yr. during your 40 working years, you would have $400k set aside for retirement. Add in some level of employer contribution and that number could be well over $500k. Add in some level of market appreciation and you could have significantly more money. Let’s look at the figures above. Take a $833/mo. ($10k annual) personal contribution, and a $208/mo. ($2.5k annual) contribution by your employer. If you compound these numbers monthly at a 7% annual rate of return you would have over $2.5M saved by the time you retire. The bottom line is that retirement is only as good as what you put into it; the earlier and more aggressively you pursue this process, the more you will have to retire on, and the more time your money will have to grow. 

 

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