I remember 1998 like it was yesterday. I had just accepted my first salaried job and was glancing at this thing called a 401K. I asked one of the senior engineers what it was. He said, "That's your retirement. Take that seriously!" He went on to explain the ins and outs of what it could grow to overtime. Within moments I said to myself, "This is big!" I entered the data based off a 2039 retirement year and the calculator spit out a number just over $4,000,000. With that, I went to work! I didn't stop at Kiplinger's Personal Finance or Money Magazine, but opted to become an altered beast on a guerilla grind studying the Dutch guilder, the Norwegian kroner, the black blood of Allah a.k.a. oil on the Mercantile Exchange, the tech heavy NASDAQ, monetary policy, dynasty trusts, etc. I attended seminars, took classes, pestered 7 and 8 figure folks and read every book in the bookstore until they all sounded the same.  After the bookstore, I took reckless abandonment to the libraries and tried to eat every syllable on the business shelf and that was just the appetizer.  You name it I studied it because from that day forward if there was four million to be there was four million for me. 

I have to admit that even after getting started, I thought if this was the case, everybody would be doing it.  I later realized tons of people were offered the opportunity but many opted out simply not knowing what they were turning away from.  These days I get sad reminders every week from the people who simply didn't know enough to take it seriously.   Lack of financial preparedness in one's early years can lead to monumental disaster in later years. This does not say that life can't throw you a curveball.  With all the elite planning in the world, disaster can strike and if you live long enough it will but that's even more reason to take these things seriously. The point is to demonstrate how important it is for you to do everything in your power to start or keep the ball rolling down the right path now while time is on your side.

Without boring you with the itemized details, the government takes about five months of most of our salaries every year for taxes which means you don't start making any money until May. The question isn't how much is taken but instead what can we do to get some of our money back?  The name of the game is compound interest and it all depends on which side of it you are on as to whether it is working for or against you.  This isn't as simple as the windshield or the bug.  Either you're the freight train on the track or the car about to get hit by the freight train.

Compound Interest Working Against You

At $75,000 a year, which is incidentally the income where most people are reported happiest, you are tens of thousands above the average household income of $46K and safely in 25% tax bracket which is a sure way to give up $30,000 to taxes.  Incidentally, in 09', 22,000 households making more than $1 million annually paid less than 15% of their income in income taxes and nearly 1500 managed to pay $0 federal income taxes, according to IRS data.  That's them, but back to the rest of us.  Of those thousands taken away from you, one way to regain some of that tax money is through mortgage interest.

Home ownership gives you the opportunity to regain the front loaded interest in your mortgage, especially during the first decade of your loan. That is a huge step in the right direction but if you are renting you don't get any of it although your landlord does. That's precisely why so many people invest in real estate. Thanks to the mortgage meltdown, we now realize a house isn't a liquid asset and while many people aren't making money during the month on rentals, they tend to make up for it in the mortgage interest deductions. Mortgages, however, work against you when you purchase a home. Compound interest makes you pay triple the sales price over a 30 year financing period if you opt not to pay down the balance early which many people don't.  Now let's see what happens when it works for you.

Compound Interest Working For You

Using the same paycheck, the other way to recoup some of that money is to have it tax deferred until you retire in an employer sponsored retirement plan such as a 401K, IRA, TSP, etc.   If you are willing to put at least 3% of your salary away, most employers will match that amount before the market conservatively adds 7-8% returns with a well-balanced portfolio. That means $2250 ($75,000 x .03) a year will not be taxed.  Instead, it will be added to your retirement account which is matched by your employer.  That means an account that started with nothing can blossom to over $215,000 over 20 years. 

When I initially started working, I earned less than $75k, but looked at a 40+ year working career.  While, I will admit that I had some life changes that the calculator didn't account for I did rebalance the numbers recently. As long as I can recalibrate by the time I'm 40 which is highly likely to occur, I'm pretty much right back on track. That kind of freedom means more to me today than ever because I assure you the people I hear from who are dependent on the government for everything from income to medical expenses are not in a situation you want to be in when you're at, near or in retirement especially if you have failing health.