When times get tough financially, we naturally look for ways to save more money. Cancel a subscription or two, downgrade the cable package, dine out less, etc. But what about saving money by eliminating contributions to your retirement account? If you have chosen this route, or are currently mulling it over, consider three reasons why funding today’s needs at the potential expense of tomorrow’s savings may not be a wise decision.
Reason #1: Contributing to a retirement plan is one of the best ways to save for the future.
An employer-sponsored retirement plan is still one of the easiest, most effective ways to accumulate the money you’ll need during retirement. Historically, through the best and worst financial environments, the market has rewarded those who have made consistent contributions. If having a financially secure future is important to you, history testifies that eliminating contributions to your retirement plan is not recommended.
Reason #2: Contributions expose less of your salary to taxes.
There are two immediate tax benefits to retirement plan contributions. First, with a traditional retirement account, your contributions are tax-sheltered. Second, your taxable salary is reduced by your contribution amount, so you end up with less of a tax burden at the end of the year.
Reason #3: Contributions unleash the power of compounding.
Compounding works like this — you make consistent contributions, you make earnings on those contributions, then you make additional earnings on your earnings. The longer that process continues, the more you can benefit financially from compounding. But without your consistent contributions, the power is minimized, which could result in your missing out on thousands of dollars in potential retirement income.
It’s important to remember that the average person can live upwards of 25 years beyond retirement — and you’ll need adequate income to cover each of those years. And currently, nearly 60% of middle-class workers are in danger of outliving their retirement income.* So the bottom line is that eliminating contributions has the potential effect of increasing your chances of being part of that statistic.
If you have any questions about the importance of consistent contributions, call us at 1-888-98-GUIDE (1-888-984-8433). To re-start or change your contribution, complete a Salary Reduction Agreement and turn it in to the person responsible for benefits at your employer.
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http://www.washingtonpost.com/wp-dyn/content/article/2008/07/12/AR2008071200143.html