Updated on 02.29.12

Contribute Regularly to That Retirement Account (59/365)

Trent Hamm

If you’ve been following the advice of the last few days, you should have a retirement plan in place. Now comes the hard part: contributing to that account.

When it comes right down to it, retirement contributions are another bill. Contributions reduce the pool of money that you have with which to pay your bills and live your day-to-day life. For many people, that’s an obstacle that’s hard to overcome, particularly if you’re in a state of living paycheck to paycheck.

Fortunately, it’s not really as challenging as it sounds.

Contribute Regularly to That Retirement Account (59/365)

Let’s say you’re 25 years old and earning $40,000 per year. You’ve decided to start contributing 10% of your salary to your 401(k). How will that actually affect your take-home pay?

To make this easy, we’ll just assume that the only deduction from your paycheck is your income tax and your retirement. We’ll also assume you get paid twice a month.

So, beforehand, you pay $6,030 in income taxes over the course of the year, or $251.25 per paycheck. Your take-home check twice a month is $1,415.42.

Afterward, you put $166.67 into retirement each paycheck. As a result, your income tax goes down to $5,030 over the course of the year, going down to $209.58 per paycheck (that’s $41.67 less in income taxes per paycheck than before!). Your take-home check twice a month is $1,290.42.

So, your take-home pay goes down $125, but you’re putting $166.67 into retirement each and every paycheck. The difference is taxes – your taxes went down $41.67 per check because of your 401(k)/403(b) contributions.

The point is your take-home pay won’t go down as much as you think. If you contribute $140 or so to retirement, your take-home pay will only go down $100 or so.

That still leaves the challenge of living on less income. There are a few strategies worth mentioning.

First, you probably won’t notice it as much as you think. It’s a lot easier to spend money on things that you forget about if you have money in your checking account. If you have a bit less money, all that will change (for many people) is that they spend less money on things they forget about.

One way to demonstrate this to yourself is to just spend a month or two keeping all of your receipts. Keep receipts for everything. Then, at the end of that period, look through them, particularly for the things you’d forgotten about that were completely unimportant. For most people, it’ll add up to far more than you thought.

Another tactic is to simply live more frugally. It doesn’t take many changes to shave 5% or so off of your spending. Things like air sealing your home or eating at home more often will likely do it. In fact, this entire “365 Ways to Live Cheap (Revisited)” series is loaded with ways to shave a little bit off of your spending, and retirement savings is a brilliant way to utilize the money you’ve saved.

Start saving now. You won’t notice it as much as you think you will and you’ll be incredibly glad you did it in a few years.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.

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  1. lurker carl says:

    Trent’s numbers don’t jive with reality, the real take home pay is considerably less than this example portrays. A lot of people are paid two every weeks but almost nobody is paid twice per month and you forgot about the mandatory FICA and Medicare taxes. These sum of these two mistakes are more than the amount going into retirement savings.

  2. lurker carl says:

    “two every weeks” should read “every two weeks”

  3. Johanna says:

    “So, beforehand, you pay $6,030 in income taxes over the course of the year”

    Where did this number come from? It looks like Trent might have looked up the tax on $40K in the IRS tax tables (it’s actually $6131 for a single person) – but that’s on $40K of taxable income, after deductions and exemptions have been subtracted out. Someone whose total income is $40K will pay much less than $6131 in federal income taxes.

    But there are also state income taxes, and as lurker carl points out, FICA and Medicare taxes.

  4. Nick says:

    The ads in the middle of the articles are pretty annoying.

  5. josh says:

    Also, if you have an unexpected windfall, please burn it to a CD-R right away.

  6. josh says:

    @Johanna – Not every state has income tax, but I get your point.

  7. Eric says:

    Many public sector workers (Fire, EMS, Police) in this area are paid twice a month, on the 15th and the last day of the month

  8. David says:

    Fascinating stuff, words. In point of fact Trent’s numbers do jive with reality, for “jive” originally meant “talk or conversation; especially talk that is misleading, untrue, empty, or pretentious; hence, anything false, worthless, or unpleasant”. What they don’t do is jibe with reality, for that verb means “to chime in (with); to be in harmony or accord; to agree”.

    I should perhaps get out more. But then I might be run over by a yellow Neon.

  9. Kathleen says:

    Every salaried job I’ve had involved payment twice per month, NOT every two weeks.

  10. Steve says:

    The point really is that Trent erred in calculating this person’s marginal rate – 25% whereas it should only be 15%. (FICA & medicare deductions remain the same regardless of 401K contribution or not).

    The $166.67 contribution is reduced to $141.67 per paycheck for this fictitious person presumably residing in a non State Income Tax state earning $40K per year being paid twice per month :)

  11. Mister E says:

    It might be my industry, or a regional thing, but pretty much everyone I know professionally is paid twice a month – 15th and last day.

  12. Jules says:

    “Only $100”

    When you’re living paycheck-to-paycheck, that’s a week’s worth of groceries and a haircut. Not trivial, if you ask me.

  13. deRuiter says:

    Totally ignores another easy way to contribute to a retirement account, which is to get a part time job and put all that money, up to what is allowed by law, into a ROTH. Then you 1. wouldn’t “miss” anything from regular income because regular income would be unchanged and 2. there would be less free time to shop, to hang out in bars hemoraghing money, or board games stores buying unnecessary board games.
    The profusion of ads and ad placement in this column are because two groups are now taking money from this blog, the author with his “passion” for writing who devotes his real “passion” to novels and the people who invested money to buy this column to flog ads for clients. The lack of interest in quality writing / content by both groups is on display, especially with a page a day from an old book and some days combining that rehash with ten things written by others or links to blogs by other writers. Pretty cushy “work.”

  14. Joan says:

    The Simple Dollar failed to show up in my e-mail for three days. I really missed all the comments by the English Literature scholars.

  15. Karen says:

    I work for a large financial company and I get paid every 2 weeks.

  16. Tom says:

    David, you certainly should not get out more. That was hilarious.
    My math shows that regardless of state income tax, the reduction in pay is more like $141 per check, not 125

  17. Stacy says:

    I’ve been putting $212 in retirement since I started my job, so I never missed it.

    All I’d spend that $212 on is crap (booze, clothes, eating out) anyway. Don’t miss it.

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