A majority of Americans got a raise going into 2018 – solely due to the Tax Cuts and Jobs Act of 2017. For those not familiar with the DC nomenclature, it is what everyone was talking about during the holidays of 2017 – all the money they would be saving next year. This tax cut is both great for individuals and the economy at large. Unfortunately, most Americans will continue to spend more than their paycheck and continue to live month to month. With the average American seeing over $1,600 in savings for the year, it’s a perfect opportunity to put that money to work for your retirement – stop the trend of overspending while simultaneously making a better future for yourself.
On average, the net gain per week post tax cut is roughly $30. This will be negligible for most Americans that have fixed expenses, though this money can go a long way in the future when invested properly. We will not argue the benefits of pre-tax or post tax, but let’s all agree that compound interest is our friend and a dollar invested today will net us more dollars in the future. This article will look at the simple benefits of investing your extra money versus not investing it.
For the purposes of this example, we will assume you have $1,000 in savings and are looking to grow that nest egg with your 2019 tax break. This investment thesis assumes you will invest in a diversified fund with normal market returns. Using normalized annual market returns and a time period of 10 years, let’s take a look at the returns:
| Starting Amount | $1,000 | $1,000 | $1,000 | $1,000 |
| Annual Contribution | $0 | $0 | $1,600 | $1,600 |
| Return Rate | 8% | 11% | 8% | 11% |
| Time Period | 10 Years | 10 Years | 10 Years | 10 Years |
| Net Savings | $2,158.92 | $2,839.42 | $25,279.48 | $29,527.25 |
The distinguishing points between these varying examples is the annual contribution. We will look at the net savings over a 10 year period by adjusting our annual contribution. The $1,600 in annual contribution highlighted on the right side of the chart are the average American household tax savings a family will see over the next 10 years, due to the tax reform. On the left side of the graph we see a contribution of $0 based on you the taxpayer spending your additional annual tax savings. The 8% return rate was chosen to highlight the worst performing market returns over a 40 year period and the 11% return rates were chosen because that is near the best for a 40 year period. Over a 10 year period, the returns could be better or worse, but 8% and 11% are the best estimates for this example. Over the life of your savings you will see that contributing a measly $30 weekly, will result in a huge savings in less than a decade.
Let’s think about the above overview in simple terms. Over the life of the 10 year period those that contributed annually, could have spent the $30 a week on other items. Though, the reality of it is, $30 will not affect your standard of living substantially and if you really needed to spent $30 you could have taken those funds from any other activity or monthly requirements.
Even after contributing $17,000 over the life of the investment, contributing your tax break now and into the future will ensure an almost doubling of your investment. That’s right – by simply not touching this “Tax Savings” you will see a solid growth of your retirement funds well into the future. These savings greatly outweigh any benefits of spending the extra $30 today – from my viewpoint, $30 barely gets you 2 movie tickets. So skip the movie and Netflix and Chill while preparing for the future.
For the average American used in this illustration, $25,000 to $30,000 is more than or almost half a years earnings. Impressive – for sure! This illustration shows that it is not too late or too early for those just starting out to better prepare for retirement Put your “tax raise” to work and prepare for the future.
Photo by Philip Taylor
