How To Manage Personal Finances Book: Chapter 14- Pickleball Wars and Understanding Retirement Plans
Author’s Note:
I am posting a text version of this entire book on Substack, and video versions on YouTube. Email ken@stltest.net for details on my 5th book’s publishing date in late ’24 or early ’25.
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Is every flat surface now a pickleball court?
I see basketball courts, tennis courts, backyards- the sport is everywhere.
Most annoying is all the old people showing up at my gym to play pickleball. They don’t attend my classes- but they walk slowly. Sort of like Night of the Living Dead carrying pickleball equipment.
Pickleball is everywhere, just like financial service ads for retirement plans.
Back in Chapter 5, Sally created a monthly budget that included savings of $300 per month. Assume that Sally has accumulated $1,000 in savings for an emergency fund, and she now wants to invest that $300 each month moving forward.
A retirement plan allows Sally to accumulate investment earnings much faster than investing in a taxable account on her own. She decides to use her employer’s 401(k) retirement plan.
Retirement plan benefits
Most 401(k) plans allow you to invest pretax dollars into a retirement plan that’s provided through work. When Sally invests $300 each month in the company’s 401(k) plan, the entire $300 is invested.
The $300 investment - and all of the earnings – aren’t taxed until she takes money out of the plan at retirement.
If Sally didn’t use the company plan, she’d pay taxes on the $300 before investing. So, not as much money would be invested.
So how much more gets invested using a 401(k) plan?
More dollars invested
Here is Sally’s salary, the tax on the salary, and her after-tax income:
Sally’s monthly after-tax income in Chapter 5 is $6,000, which is annual income of ($6,000 X 12), or $72,000.
If Sally invests in the 401(k) plan, the entire $300 is invested. If she invests outside of a retirement plan, the dollars invested total ($300 X 75%), or $225. $75 goes to pay taxes.
Over 20 to 30 years, that extra $75 investment each month can make a huge difference in Sally’s total return.
The dollars invested directly in the 401(k) account also reduce Sally’s taxable income- but that’s a story of another day. For now, I’ll keep the focus on her investment.
How a retirement plan match benefits you
A retirement plan match refers to the additional pre-tax dollars an employer will invest in your retirement plan, based on the amount you personally invest.
Let’s say that Sally can receive an extra 5% match on her 401(k) contributions. If you don’t invest in your 401(k) and get the company matching dollars, you’re leaving money on the table. That extra 5% adds up over time.
The employer 401(k) match increases Sally’s monthly contribution from $300 to $315.
Find out if your employer offers a retirement plan. Speak with an investment advisor about retirement plan details.