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Workout No. 4: Build Up Your Retirement Booty

This article is part of our Newlywed Financial Boot Camp series, designed to get new couples and their finances into shape. You can find the other articles in this series here.

Every fancy get-in-shape plan in the world boils down to two decidedly un-fancy words: diet and exercise. One diet may have you eating nothing but grapefruit, another eschewing carbs for protein, but they all have a way of getting back to the plain truth: Eating less while burning more calories is the way to a better body. 

What's the plain four-letter word that can make all the difference to your retirement?

S - A - V - E.

Hoping for something more magical? Perhaps an exciting stock pick or a secret code word? Swallow your disappointment and prepare to be amazed by what saving can do for you.

Four simple truths of saving for retirement

1. The sooner you save, the better. Already know this one? Maybe so, but the miracle of compound interest -- especially over the long haul -- never gets old. Take the case of Joe and Suzy Newlywed, who began socking $250 away every month since the day they were married. Assuming an 8% rate of annual growth, the Newlyweds will have $46,291 in their retirement account on their 10th anniversary, and $375,324 after 30 years of wedded bliss. Compare that to saving $250 per month at 0% interest -- $30,000 after 10 years, and a mere $90,000 after 30 years.

2. Saved money is worth more than spent money. Take a nice, round number like $1,000. Considering whether to spend that grand on a nice, new TV or put it in savings is a lot like comparing apples to oranges. The thousand you spend is actually worth a whole lot less. Confused? Don't be.

When you earn $1,000, you must first pay income taxes on it. If you and your honey are taxed at the 25% rate, that leaves just $750 of your hard-earned $1000 left to spend. Then consider that you'll be hit with sales tax on any purchase (assume 4.5%). Your $750 will purchase a television that costs just under $718, with $32.30 going to sales tax.

Take that same $1,000 and put it in your company's 401k plan and what do you get? Assuming a company match of 50%, your $1,000 (untouched by Uncle Sam since contributions aren't taxed) will now have a value of $1,500.

There's no doubt that $718 is a whole lot less than $1,500.

3. Career greatness equals retirement riches. A raise can substantially impact your retirement savings. Take the example of Joe Newlywed, a 22-year-old married guy who is a real go-getter. Of the $30,000 starter salary he earns, he socks away 10%, plus he gets 6% raises every year. Assuming an 8% rate of return, at age 67, Joe will have amassed just under $3 million. Compare that to his friend Dave who saves 10% of his $30,000 salary but gets only 4% raises each year. Dave will have just more than $2 million for his efforts by age 67. Even small differences add up over the long haul.

4. Saving trumps interest. While maximizing your rate of return is important, don't let it outshine saving.

Suzy Newlywed believes in saving and is able to put away $500 a month. Though her contributions earn a modest 6% return, after 20 years, she will have $232,676 put away for a rainy day. Her friend Jen prefers to save less and chase higher returns. Jen puts just $250 away monthly but is proud to be earning a 10% return on her investment. Think Jen will still come out ahead? Wrong. After 20 years, Jen's fortunes will have reached $191,674, a full $41,000 less than her savings-happy friend.

When beginning to plan your retirement, be sure to incorporate the simple advice to save. You and your beloved will be surprised by how drastically you can affect your fortunes just by spending less and saving more. Over the long haul, it may even begin to look like magic.

Next: How to Stay in Financial Shape.

Fool contributor Elizabeth Brokamp is a licensed professional counselor who regularly talks money with her honey, Robert Brokamp, editor of The Motley Fool'sRule Your Retirement newsletter. The Fool has a disclosure policy.


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