Would You Turn Down a Raise?

Leaving Money on the Table

When’s the last time you got a raise? A raise can come in the form of an actual increase in pay. Other times an increase in cash-flow can come from somewhere else. It’s important to still treat it like a raise, because you have more income available to put towards your goals. Plant the seeds today for the future you want to experience.

Would you turn down a pay raise? In 2019, less than 70% of non-government workers in the U.S. had access to a retirement plan at work. Less than 55% of those same workers actually participated in a retirement plan through their job. They are leaving money on the table and paying more of their income on taxes.

Another type of raise is when your cash-flow increases. When you pay off an account, reduce or eliminate an expense, those dollars become available for you to invest elsewhere. Be proactive in shopping for better rates on insurance and other necessary services. Take advantage of all the discounts and perks you may qualify for. If your credit score has improved over the past few years, you may be eligible for lower interest rates on existing loans.

Take that Raise

If your employer offers a retirement plan, take advantage of it from day one. Contribute at least as much as your employer will match. If your employer matches your contributions up to 3%, that’s like getting an additional 60 hours of pay each year. When you make a contribution, those funds are removed from your pay before taxes. This reduces your tax bill each year. Be sure to continue increasing your contribution whenever you can. In 2020, the maximum total contribution allowed is $19,500 per year!

If your employer does not offer a retirement plan, do everything you can to contribute to your own IRA or Roth IRA account. Unfortunately the maximum annual contribution allowed in 2020 is $6,000 ($7,000 if you’re over the age of 50). It may help reduce your taxes either now (Traditional IRA) or during retirement (Roth IRA). Talk with your tax or investment advisor to determine the best options for you.

Begin at the End

It’s really helpful to know where you want to end up. Consider at what age you would like to spend most of your time doing the things you love. There’s no magic number. Depending on your birth year and wages, you may qualify for Social Security Income at age 62 and Medicare at age 65.

Consider what your lifestyle will look like at that point. Will you own a home free and clear or rent a living space? You can rent out your home while you’re traveling to create additional income. You could share a space with others to keep your living costs at a minimum. There’s no right or wrong answer. Imagine the life you want.

Once you identify an age and how much income you will need, then you can do the math backwards. Based on your expected living expenses, select a monthly income amount. Keep in mind that some of your income in retirement will be non-taxable. Some experts recommend estimating 70%-80% of our current income. Again, it really depends on what your living expenses will be at that time. Here’s a sample retirement calculator to help identify how much total savings you will want to have by that time.

If you will have income sources outside of your retirement funds and Social Security, be sure to reduce the amount you will need to save. Also, consider how long your funds will need to last. There are two approaches to retirement savings. One approach is to live off of the interest and growth of your funds, so the Principal remains fairly consistent. This approach is for those that want to leave an inheritance. Another approach is to use up your funds without running out. Either way, you need to know how much you need to save and seek out financial guidance from a trusted advisor.

Spend Well. Save Wisely. Find Your Financial Zen.

Photo courtesy of Dominic Alberts on Pixabay.