Young Justin Thyme left Holland, Michigan and made off for Chicago, degree in hand, ready to make his way in the world. It took a few years to get on his feet, but at 33, he found himself making $50,000 per year and loving the big city. He also found himself pondering his economic future.

There are lots of ways to spend money in the Second City, and Justin has yet to save a penny for retirement. This is making him nervous. It should.
ESPlanner can show Justin the consequences of saving nothing, saving outside a retirement plan, and saving through his employer’s 401(k).

The first option—save nothing and rely solely on Social Security benefits—lets Justin spend before retirement $38,001 a year after taxes. But when he hits 65, his living standard falls off the cliff, dropping to $10,276 per year for the rest of his life.
Unacceptable.

Option 2—saving on his own the amount needed to sustain his living standard throughout his life and earning an assumed 3 percent real (after-inflation) return—entails a 29.57 percent cut in his pre-retirement living standard, but a 160.47 percent rise in his living standard in retirement. Option 2 keeps his savings accessible, which is something Justin likes.

Option 3 is saving through the company’s 401(k), albeit without any employer match since his company offers none. Every dollar contributed reduces Justin’s taxable income by a dollar. But he does have to pay taxes on all the money he ultimately withdrawals from the plan, which, by the way, earns the same real 3 percent.

The tax breaks are huge. By saving through the 401(k) Justin can enjoy a 12.73 percent higher living standard each and every year through age 100, if he makes it that far. Were Justin to save on his own, he’d have to work an extra 4 years to generate the same permanent living standard hike.

Saving via the 401(k) requires Justin to cut his current spending from $38,001 to $30,172, but that’s a lot better than cutting it to $26,766. Better yet, Justin can now sleep at night.