Assume you just graduated college and your starting salary is $65,000. Every morning you purchase a 12-ounce iced almond milk with caramel latte for $7.40 (cost is $7.05 plus 5% sales tax). You go to lunch for $18.90 (cost is $18 plus 5% sales tax) and every afternoon you need that medium cup of coffee for $3.81 (cost is $3.63 plus 5% sales tax). If you are in the 22% federal tax bracket and the state taxes are 5.5%, the before-tax cost is $46.43 for these three items.

The $30.11 to purchase these three items are paid with after-tax dollars. To calculate the pre-tax dollars needed, you take the $30.11 and divide it by one minus the tax rate of 35.15% to obtain $46.43. Here is a sample calculation of the various taxes that total 35.15%, based upon current rates [1]:

Federal income tax rate  22.00% (estimate)

FICA tax Rate  6.20%

Medicare tax  1.45%

State income tax  5.50% (estimate)

Total-Tax Cost  35.15%

I want you to understand that it takes $46.43 of your pre-tax earnings to pay for the $30.11 of items listed above.

We suggest that a college graduate might elect 15% of their salary for retirement and based on a $65,000 salary or $9,750. If you don’t pay yourself first by making that 15% election, you may never seem to find the money to save for retirement if the money is not deducted first from your paycheck. Let’s see what percentage of your salary is being spent in this daily routine example. The $46.43 cost is multiplied by 5 days a week, the pre-tax weekly cost is $232.15. Assume after vacation and holidays you only work 48 weeks; the yearly pre-tax cost is $232.15 x 48 weeks or $11,143.20 which is 17% of your gross salary!

This is a hypothetical example and is not representative of any specific situation. Your results will vary.

I want to challenge your thinking so that you can reach the 15% of salary or $9,750 of your salary goal by looking at your daily routines and associated costs to determine if you can cut some of these expenditures out. For example, have breakfast including your coffee at home or start brown bagging your lunch to free up the cash for retirement, house, etc. Looking at your daily purchases and becoming wise with your money can make for an enjoyable retirement.

Assume further that your employer provides a 3% match, taking your 12% contribution you have now reached the 15% target. If your employer does not have a 401(k) option, you may be able to fully fund a Roth IRA contribution of $7,000 for 2024. A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

I know this assumes you cut all the costs out in my daily routine example. However, I would not suggest that as we need to eat and drink. What I will suggest is that looking at the cost of your choices (for example, paying for a comprehensive cable package when you only view a couple a channels a few times a week, paying ATM fees, having credit card debit with high interest rates, buying a car with a moon roof you never use, etc.) you can find that retirement money with very little pain.

It is a choice to save and with some minor adjustments you will find expenditures that can be used for savings. With the media wanting you to live for today and blitzing you with all these luxury items that you need now, it can be challenging at times. However, cutting out the daily costs for convenience can be the first step in helping you pursue your retirement goals.

[1] Internal Revenue Service. (03-25-2024). Topic No. 751 Social Security and Medicare Withholding Rates. Retrieved from https://www.irs.gov/taxtopics/tc751.