If you think about money in terms of time, you can see the value of increasing your retirement contributions.
What does a 3% 401 match mean to you? If you’re a little math-challenged—like most of us—it probably doesn’t mean much. It’s a number, just like all the other impossible numbers associated with retirement, that never seem to add up to enough.What if you think about money as time?
Think about it this way: If you make $50,000, which is $961 per week, and you contribute 3% of your salary to your 401, that’s $1,500. If your company matches that, they add $1,500 to your account on top—almost two weeks of pay. If you invest that much each year for 25 years in an account that earns an average of 8% return over 25 years, you have just over $100,000 at that point, which is two years of your current salary.
Garrett’s formula assumes compounded investment growth at an 8% annualized return over 25 years, because he’s gearing this for long-term retirement savers. While that return might seem impossible at the moment, he says it still makes sense given historical market averages. The returns can be scaled to be more conservative, and the math works with any level of salary, assuming your retirement spend is proportional to your earnings. It also works with any level of 401 match.
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