The Retirement Blues

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Charlene writes in:

I’ve been contributing 10% to my 401(k) since the day I started my job fourteen years ago, and my employer kicks in 6%. I’m now 36 and I have about $200,000 in there.

I should be happy about that. I’m not. Whenever I look at that money, I just see tons of opportunity lost. I’m still struggling with my student loans and I live in a crummy apartment. $200,000 changes all that.

I can understand that feeling, but I think you’re misrepresenting what’s actually in your retirement account. So, let’s start off by breaking it down and looking what you would actually have in your pocket if you hadn’t contributed all the way along.

First of all, 37.5% of the contributions to the account were bonuses from your employer. So, right there, we can whack away $75,000 of the total. $125,000 of that amount was due to your contributions.

Also, that amount has been growing steadily over the last twelve years. Assuming you contributed the same amount each year and the amount has grown an average of 7% a year, that means your actual contributions were about $5,200 per year. My guess is you’re contributing $100 a week based on the numbers you gave me.

Okay, let’s also assume that you would be paying 30% income taxes on that money. Your $100 extra in take-home each week falls to $70.

Do you want to know how much that $200,000 in retirement savings actually cost you in take-home pay? Only $50,960. You would have brought that amount home at a rate of roughly $70 a week.

Now, let’s say you were bringing home an extra $70 a week all that time. It would be easy to say that you would have used it to pay down debts, but is that the honest truth? If your paycheck were bumped $70 a week, would you live the exact same lifestyle you have right now and always use all of that $70 to pay down debts and save for a down payment?

Very few people would honestly be able to say that.

To put it simply, your overall financial life might have been a bit better had you not invested in retirement, but it wouldn’t have been significantly better. You’d likely still have that apartment and you’d likely still have some student loan debt.

Now, look at it this way: instead of whatever you would have spent that $70 each week on, you now have $200,000 in the bank for retirement at age 36. Assuming that it continues a steady rate of 7% growth, even if you never contribute another dime to that account, it will have a value of more than a million dollars on your 60th birthday.

If you were to give me a choice of a slightly better day-to-day financial situation with $0 in retirement versus a slightly worse day-to-day situation with a retirement account that’s going to be worth $1 million at age 60, guess which one I would choose?

Because of the choice you made to save for retirement, Charlene, you’re most likely going to be able to just retire without a bit of worry when you hit your sixties. Your exact retirement date depends on how large you want to live in retirement.

If you hadn’t done that, you would have been working until you were pushed out, then you would have lived hand-to-mouth waiting for the next Social Security check.

Giving up $70 a week now has basically transformed the last years of your life from a challenging and potentially miserable experience into a wonderful one.

Here’s the reality. The money you put away for retirement is money you’ll barely miss. It’s money that, for the most part, you would have spent on things you didn’t really need anyway. By putting it into a 401(k), you’re not paying taxes on it, you’re getting free money from your employer that you would not have otherwise received, and it’s going to grow by leaps and bounds toward retirement.

You might wistfully think about some of the things you might have done with that retirement money if you hadn’t saved it, but in the long run, you will never regret a dime that you put in there. It’s peace of mind right now and it’s a much better life later on.

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