Retire a Millionaire for $2 Per Day

Retire a Millionaire for $2 Per Day

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In a recent post, Here are Three Reasons People Don’t Invest Enough, we talked about how a 25-year-old can retire a millionaire for only $184 a month. But the truth is, you can actually achieve that goal for a lot less – about $2 per day if done right. That’s right, for only $60 per month (about the cost of a cup of coffee each day) you can retire a millionaire.

To reiterate, the $184 per month was based on the premise of starting young (working and contributing for 40 years) and earning an average 9.5% return on your money. While we briefly discussed the concept of matching contributions from an employer, based on feedback, some of you pointed out that there are employers who match 100% of your contributions! We also wanted to go one step further and discuss one of the other top features of retirement investments: The tax advantage.

The Numbers

Almost all employers have switched from a defined benefit retirement plan to a defined contribution plan. In doing so they now offer a “matching” contribution into your retirement account. In other words you put in a dollar and they put in a dollar. Usually up to a certain percentage of your pay. This match can vary but typically runs 3-6% of your pay. That means that if you are making $36,500 a year and contribute just 3% of your pay to your retirement account ($91.25 per month) your employer will make a matching contribution (another $91.25 per month). And boom you now have $182.50 each month going into your retirement account. You can achieve the goal for only $91.25 each month.

Your Monthly Investment

$91.25

Employer Monthly Match

$91.25

Total Monthly Investment

$182.50

But that is still more than the $2 a day I was talking about a moment ago. Most people understand that when they put money into their retirement account they get a tax break. They don’t have to pay taxes on that money until they take it out in retirement. But they don’t quite grasp that the inverse also holds true… when you don’t put the money in, you WILL pay tax on it NOW. If you don’t put that $91.25 into your account you will owe about a third in federal and state taxes or roughly $31.25.

The Tax Advantage

So think about it. If the $91.25 doesn’t go into your retirement account, it gets filtered through the IRS withholding and only $60 actually makes it through to your paycheck anyway. What you would have left is a measly $60 in spendable income each month or about $2 per day. So for giving up roughly $2 per day in spendable income, you can retire a millionaire. If you have a working spouse that is contributing the same amount, the two of you can easily retire as multi-millionaires without ever feeling any real financial sacrifice along the way. And keep in mind these numbers assume you NEVER get a pay raise. If you contribute 3% of your salary with a 100% company match and average a 3% pay raise each year, you will have considerably more than $1 million.

Your Monthly Investment

$91.25

Tax Savings

$31.25

Reduction in Monthly Cash

Reduction in Daily Cash

$60.00

$2.00

Side note: If you have an employer who has a matching contribution you really MUST contribute at least the minimum to get the full match. Otherwise you are throwing away an immediate 100% return on your money. And I don’t know anywhere you can get an immediate 100% return on your investment.

If you would like to download a free copy of the Excel File used to create the tables and charts from the previous article, click here.

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TheMoneyProfessors

The three authors, Bill Pratt, Mark C. Weitzel, and Len Rhodes, are industry leaders in personal financial education. Together, they have a combined 75 years of experience in banking, economics, and entrepreneurship. Now, they teach thousands of students personal finance concepts and decision making skills, author textbooks and public press books on personal finance, and help schools develop innovative personal finance literacy programs. Recently, they were instrumental in developing a personal financial management certification program for leaders in higher education. The other books in The Money Professor series include The Graduate’s Guide to Life and Money and Extra Credit: The 7 Things Every College Student Needs to Know about Credit, Debt & Ca$h. Their books, lectures, and programs give students, parents, and educators the tools and knowledge to make good financial decisions all their lives.

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