With the recession over and CD rates at record lows, this seems like the right time to divert more savings into a 401(k) plan.
If you haven’t been laid off by now, you probably won’t be. So you can risk tying-up more money in long-term savings.
And you’ll probably save more on your taxes than you can earn from the record low returns on CDs or money market accounts.
Putting even a little more into your 401(k) plan can also make a big difference in your net worth.
Let’s say you contribute an additional 1% of your income — a modest increase by almost any definition.
If you’re making $50,000 a year, and get paid twice a month, that’s $20 per paycheck.
Although the full $20 will go into your retirement plan, your take-home pay probably won’t decline by that much.
Contributions to traditional 401(k) plans are tax deductible, which means you don’t have to pay income taxes on that money until it’s withdrawn.
That is one of the things that makes these kinds of retirement plans one of the most valuable tax breaks available to most of us, right up there with the ability to deduct the interest on a mortgage.
It also means your take-home pay will only fall 65 to 90 cents for every dollar you save, depending on your tax bracket.
But that extra $20 per paycheck can add $49,000 to your retirement savings over a 30-year career if the investments in your 401(k) earn a good, but not spectacular, average return of 7% a year.
If your employer matches all or part of that contribution, you’ll be even further ahead.
You’d have an extra $74,500 if that 1% increase on your part leads to your company boosting its contribution to your 401(k) account by 0.5% of your income.
See just how much you could benefit from boosting your contribution with our 401(k) calculator.