Financial Education in the Workplace: The 2% Decision

December 28, 2010

Now that our politicians have finally come to a decision about the new 2011 tax law, your employees have a decision of their own to make – what will they do with the 2% raise they will see in their paychecks?  With the December 17th passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, employees will only pay 4.2% towards Social Security tax in 2011, instead of the traditional 6.2%.

For an employee making $50,000 this means they will receive an additional $1,000 in their net take home pay for 2011.  A forty year old employee who contributes an extra $1,000 towards their 401(k) just in the year 2011 would have an additional $8,000 at age 67, based on an aggressive investment strategy.  However, if the employee decides to increase their salary deferral by that extra 2% in 2011, the odds are that they will continue to contribute that 2% (even if we go back to the traditional 6.4% Social Security tax in 2012) and will have over $95,000 in additional funds saved for retirement without even considering any future raises, just based on their current $50,000 salary.  It gets even better for a higher income earner, since the Social Security tax applies to wages up to $106,000 in 2011.

Before your employees get used to that extra spending money, spread the word about saving more.  Have a financial education workshop that covers all the new tax law changes that impact your employee base, or send out a flyer encouraging them to make the 2% decision towards their 401(k).  Then ask yourself, what plans have you made for your 2% decision?