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Sunday, March 6, 2011

Figure the Impact of Saving Your Payroll Tax Cut

Financial planners recommend upping the contribution to your qualified accounts (IRA, Roth IRA, or company 401k etc.) by the amount of this year's payroll tax cut. Admittedly, this isn't easy, now that food prices are rising and gasoline prices have spiked. Still, if possible, a 2% pickup in your personal saving rate can make a huge difference for many people. This is especially true for younger people, in light of the state of Social Security and its likely changes.

To quantify some of this, the New York Times "Savings Calculator" is a useful resource. You can see the inputs DIY Investor put into the calculator. DIY Investor assumed a $40,000/year income, 10% savings rate, 8% investment return, and a 20-year time horizon. This produced an end-of-period savings balance in inflation adjusted dollars of 
Source: New York Times
$333,549, as shown by the bottom line in the calculator's accompanying graph.


Next DIY Investor assumed the savings rate was increased by 2%, by putting the payroll tax cut into savings. Keeping everything else the same produced an end-of -period savings balance of $393,735--an increase of approximately $60,000.

All of this translates into choices 20 years down the road. In real terms, it may make the difference between having to work another year and a half or having the flexibility to retire.

This is a useful tool, DIY Investor believes, for motivating young people to save for the future. The next few years will reveal how poorly this has been done by the "boomer" generation.


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  2. The reputable and dependable payroll service should always ensure that they will assume any liability for payroll mistakes. Weather the mistake is inaccurate amount or a late payment.