Most employers who offer a 401k or similar employer sponsored retirement plan offer some sort of match. By using this as your primary savings for retirement you can increase the value of your savings while bringing home a larger paycheck. Let’s take a look at an example.
Let’s say John and Jane each make $25,000 and are taxed at 25%. Their employer matches 401k contributions, up to 50% of the first 6% of pay. Importantly, both John and Jane decide to set aside 6% of pay, or $1,500 per year for retirement. The difference, Jane uses the 401k while John saves outside the plan. Here are the numbers.
Jane’s retirement balance increased $750 because she contributed to the plan, thus receiving the match. In addition, because her contributions are pre-tax, her take home pay increased $375.