Double your savings …in more ways than one

Published October 5, 2013 by Cal Brown

What is the best tax break going? That’s easy — a qualified retirement plan. And the most popular retirement plan in America is the 401(k).

In an effort to raise awareness for the 401(k), the Plan Sponsor Council of America (PSCA) annually supports a campaign to celebrate your retirement plan. In 2011, the PSCA encouraged 401(k) providers across the country to “Make Everyday 401(k) Day.”

That’s why Savant Capital Management is designating the week of Oct. 13-19 as “National 401(k) Week,” a time dedicated to spreading awareness about the importance of saving for your future.

One way to get started is to talk about multiplying 401(k) benefits to your advantage.

Most tax deductions require you to give up control. But with a 401(k) you retain control of your money. You simply take it from one pocket and put it in another pocket, and you get a tax benefit for doing that. In other words, you take money from your paycheck and put it into a 401(k) account — your 401(k) account — and you save taxes. So, you get a double benefit! You save money for retirement, and you save on taxes now.

Additionally, most 401(k) plans have some kind of matching contribution by the employer. You put in a certain amount (or a percentage), and your employer matches your contribution. In some cases it is a 100 percent match up to a certain amount. Talk about doubling your money! It doesn’t get much better than that.

Actually, it does, because in addition to the match, you get a tax break— make that a double tax break, because you don’t have to pay taxes on the employer’s matching contribution. And that’s not all. In fact, as your money is growing, you do not have to pay taxes each year on that growth — no taxes on interest, dividends or capital gains. As long as you let your money grow you pay no taxes until far in the future, when you decide to start withdrawing from your 401(k) after you have retired. However, you could incur penalties if you withdraw money from your 401(k) before age of 59½.

Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn't…pays it.”

Have you heard of the Rule of 72? It is a simple formula to determine how long it takes for your money to double. You simply divide 72 by your investment return (or interest rate), and that gives you the number of years until your money doubles.

For example, if your 401(k) investments average 8 percent per year, divide 72 by 8, and the answer is 9 years. So, if you invested $10,000 and got an 8 percent return, your money would double to $20,000 nine years from now.

Even better, with a 401(k) we’re not talking about a one-time investment, we’re talking annual investments. So each year that you put money into your 401(k) plan, that money
would have the opportunity to double over time.

Now, that 8 percent return is not guaranteed of course. The actual return you get depends on a variety of factors, including the investment options available in your
plan, the particular asset allocation you select, economic and market conditions from year to year, and the plan’s costs. Make sure to ask questions in order to get good
advice on choosing the right risk/reward mix that makes sense for you.

Recent developments in 401(k) plan design are driving down costs by including investment options with lower fees, specifically index funds and other passive
investment options. Lower costs mean higher returns for plan participants.

So, double down and double up! The longest journey starts with the first step. In this case, the first step is to sign up for your company’s 401(k). Ask about your company
match, and, if at all possible, contribute the amount necessary to maximize that match — it’s free money, so don’t leave it on the table! Then ask for advice on asset allocation.
And let the doubling begin.

Cal Brown is a financial advisor and market manager with Savant Capital Management, which has an office in McLean.