The Republican tax overhaul has suddenly become a reality, and the public certainly has a wide range of opinions about whether the new plan will help working Americans or hurt them. Among other things, the legislation lowers the corporate income tax rate from 35% to 21%, which will no doubt benefit countless businesses, their executives, and their shareholders. But believe it or not, the common worker might also come to benefit from this change, especially since several large companies have already announced plans to share the wealth.
Specifically, Comcast (CCZ -0.99%) and AT&T (T -0.43%) have already stated that thousands of employees will receive $1,000 bonuses in light of the aforementioned tax changes. And Wells Fargo (WFC 0.89%) has pledged to raise its companywide minimum wage to $15 an hour.
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If you've been on the fence about tax reform (and really, you wouldn't be alone), it may be time to bust out a healthy dose of optimism heading into the new year -- especially since your company's savings could trickle down to your paycheck.
Use your pay boost wisely
If you end up being one of the lucky ones who sees a pay increase or bonus, it's important to make the most of that extra cash. And for most Americans, that means building up emergency savings. An estimated 39% of U.S. adults have no money in savings whatsoever, which means they're completely vulnerable in the face of unplanned expenses. Nearly half the population lacks the funds to cover an unexpected $400 bill. So if you're considerably short on savings, the first thing you should do with any extra cash that comes your way is stick it directly into the bank.
On the other hand, if your short-term savings are in decent shape and your company decides to be generous next year, your best bet will be to take advantage of that largess to boost your retirement nest egg. Nearly half of U.S. households have absolutely nothing set aside for retirement, according to the Economic Policy Institute, and the median savings balance across all families is a mere $5,000. The sooner you start, the better, because the power of compound growth is one of the strongest tools for retirement savers.
For example, let's imagine you wind up with an extra $200 a month in your paycheck as a result of your employer's trickle-down generosity. If you were to stick just that additional money in a retirement account every month going forward, here's what you'd end up retiring with, assuming a $0 savings balance to start:
|
If You Start Saving $200 a Month at Age: |
Here's What You'll Have by Age 65 (Assumes an 8% Average Annual Return): |
|---|---|
|
25 |
$622,000 |
|
30 |
$413,000 |
|
35 |
$272,000 |
|
40 |
$175,000 |
|
45 |
$110,000 |
|
50 |
$65,000 |
TABLE AND CALCULATIONS BY AUTHOR.
Remember, come 2018, you'll have the option to sock away up to $18,500 per year in a 401(k). (If you're 50 or older, this limit shoots up to $24,500.) Even if you don't have access to an employer-sponsored plan, you can still contribute up to $5,500 per year to an IRA if you're younger, or $6,500 a year if you're 50 or over -- so it pays to maximize whatever account you have.
Of course, just because a few companies have said they intend to share their tax savings with workers doesn't mean that most employers will follow suit. But if you're fortunate enough to see some benefit from the recent tax changes, then you're best off routing that cash toward establishing an emergency savings account or preparing for retirement -- especially since we don't know how tax rates and rules will evolve in the future.
