The Cost of Not Contributing

“[Taxes are] a leakage of economic value." - John Malone

Many view retirement plan contributions as an expenditure. Money going out of your pocket.

What if the conversation was framed differently? Have you budgeted for the annual expense incurred for not maximizing a retirement plan contribution?

This is not a discussion of affordability - that's a more nuanced cash flow conversation. This is isolating the objective cost (paid via income tax) of someone not taking advantage of a government handout.

A simple example. The household below are 30-year-old newlyweds. They are taking in a combined annual gross salary of $250k. They rent an apartment in Boston, travel frequently and spend freely. They signed up for their plans five years ago just to get the employer match and have not increased since (currently, each contributes $6k annually ($250 per check) to their plan.) 

They know that retirement savings are important, but there is little urgency at this point in their life to make it more of a priority. How much is this decision costing them in 2018?

First, let me recognize the significance of the savings increase. In order for the household to maximize contributions in 2018, there would be an increase from the current $12k to the 2018 maximum limit of $37k. I will reiterate that affordability/cash flow management is a different conversation.

For this couple, the decision not to take full advantage of their retirement plan contribution window would cost them over $7k in additional tax in 2018. Had the $37k maximum contribution been made, that additional tax would be non-existent.  

Below, case 1 shows the current contribution level of $12k, while case 2 illustrates the effect of the $37k contribution (via a reduction in wages.)

Make no mistake - retirement plan contributions are not an expense. It is not money out of your pocket. They are a wealth creating machine. How much are you leaving on the table each year?