# Increasing Your 401(k) Contributions: Benefits and Drawbacks

Lately, I’ve had a lot of fun playing with this 401(k) contribution calculator. Ever wondered what sort of impact changing your 401(k) contribution would have? This calculator tells you based on your own information. What’s interesting is that for most people, the benefits far outweigh the drawbacks.

To play with the tool, I created a person I call “Jimmy” with the following attributes:

Jimmy wants to contribute 1% to his 401(k), and his employer will match that 1%.
Jimmy is 29 years old, and intends to work for 31 more years.
Jimmy makes \$55,000 a year, and is in the 28% tax bracket.
He also pays 3% in state income tax.

This is a pretty typical situation for a person entering their thirties.

Short term costs Putting away 1% of his paycheck will cost Jimmy \$32 a month in take-home pay reduction. Over a whole year, that’s \$384.

Short term benefits However, Jimmy’s income tax bill is reduced by \$171 by the contributions. Remember, a 401(k) contribution is before taxes, so Jimmy doesn’t have to pay income tax when he puts in the money, just when he withdraws it.

The short term balance This means that Jimmy’s total real cost for his contributions is \$213 (\$384 paid in, minus the \$171 tax benefit). However, his 401(k) balance goes up \$768 (\$384 in his own contribution, and \$384 from his employer). Immediately, Jimmy’s \$213 becomes \$768 in his retirement account. This is why employer matching is such a big deal – you simply cannot get that kind of return on your dollar anywhere else.

Long term benefits If Jimmy keeps putting in that 1% until he retires at age 60, and the investment returns 9% over the long haul, Jimmy will have \$164,533 in his retirement account.

So, let’s extrapolate that a bit. If Jimmy were to contribute up to 5%, which is his employer’s maximum match…

Jimmy will lose \$158 a month in take home pay. That’s the only real drawback here.

However, Jimmy will have his income tax bill reduced by \$853.

Plus, Jimmy and his employer combined will contribute \$3,792 to Jimmy’s 401(k). Jimmy’s total cost for that benefit is \$1,043. That \$1,043 instantly becomes \$3,792 in the retirement account.

Here’s the kicker. For just that \$1,043 a year, Jimmy will have \$822,664 in his retirement account in 31 years. Is it worth reducing Jimmy’s weekly spending by \$20 to make him almost a millionaire at age 60? I certainly believe so.

What’s the real story here? If you’re passing up on 401(k) contributions now, especially if your employer offers any matching, you’re doing yourself a massive disservice. Even if Jimmy could only contribute \$5 a week, that adds up to about \$205,000 at retirement for him – and very similar numbers apply to you.

Make it a high priority to contribute to your 401(k) at least up to what your employer will match – there is almost no better investment on earth that you can make.

##### Trent Hamm
###### Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.