How Much Does It Cost to Save for Retirement?

Let’s look at three employees. Amy wants to save $100 per pay period for her retirement with post-tax money. Chris decides that he wants to contribute $100 per pay period on a pre-tax basis. Susan knows how saving $100 per pay period on a post-tax basis affects her paycheck but wants to see how much more she could save on a pre-tax basis. The effect on their take-home pay may surprise you.

Tax-Deferred Savings Plan Paycheck Comparison

Susan is the winner in this scenario. She has almost as much in her take-home pay as Amy, but Susan can contribute more than $145 per pay period to her retirement because taxes are not currently taken out of her contribution. Over the life of her career, this could make a big difference in the amount she has when she retires.

Taxes and other deductions vary based on where you live, and this is just a hypothetical example for illustration purposes only. Also remember that when Chris and Susan retire, they will have to pay taxes on the money they save on a pre-tax basis because the taxes have been deferred. However, because they are able to contribute that money without currently paying taxes, their contributions can compound and potentially grow more than if they would have saved on an after-tax basis. This example assumes a fixed annuity. Withdrawals and distributions may be subject to income tax and, for some tax qualifications, may be restricted. If taken prior to age 59½, a 10 percent federal tax penalty may apply.

This Web site is not intended or written to be used as legal or tax advice. As a taxpayer, you cannot use it for the purpose of avoiding penalties that may be imposed under the tax laws. You should seek advice on legal or tax questions based on your particular circumstances from an independent attorney or tax advisor.

*Statistics compiled from the 2004 Retirement Confidence Survey, Employee Benefit Research Institute; and "Coming Up Short: The Challenge of 401(k) Plans," Alicia Munnell and Annika Sunden