In the long run,how much you will be loss?
In the past couple of years as the economy has slowed, I have seen a variety of creative methods by people trying to cut corners to increase cash flow, from bringing their lunch to work, to clipping coupons. On occasion, I have seen a few clients contemplate cutting back, or completely stopping contributions to, their 401(k) or 403(b). Although this may seem like a good short-term strategy to increase cash flow, it has a few long-term implications that can prove detrimental.
Taxable income increases
First of all, every dollar that you contribute to your retirement account lowers your taxable income by a dollar. If you make $50,000 a year and contribute 6 percent of your salary, which is $3,000 ($50,000 x 6 percent = $3,000), you will lower your taxable income by $3,000. Therefore, if you cut back your contributions by $1,000, then you are also increasing your taxable income by $1,000. This means that your goal to increase cash flow may be short-lived. When tax time rolls around, you may end up owing more in taxes, because of the higher taxable income. This, of course, helps defeat the purpose of trying to improve your cash flow.
Losing company match
Second of all, many companies offer a company match with their retirement plans. For example, many companies match 1 percent on the first 3 percent you contribute and 0.5 percent on the next 3 percent. So if you cut back your contributions to less than 6 percent, you may be missing out on the company match. And not contributing at least enough to get the company match is, well, plain foolish in my opinion. A company match is free money to you. Why would you not take advantage of it? This is free money that will definitely help your cash flow in retirement.
Additionally, by cutting back on your retirement contributions, you are missing out on the power of compounding and the power of time. To continue with the previous example, if you lower your contributions by $1,000 year ($83.33 a month), and assume a conservative 5 percent annual return, over 20 years you will be losing out on more than $13,000 of interest.
Better think about that..
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