Tom, a 25-year-old, is earning $40,000 a year, but his employer does not offer a 401(k) or other retirement plan. Tom contributes to an IRA, but like many people his age, Tom is not completely convinced Social Security will be around when he is ready to retire. He has decided to supplement his retirement savings by investing $2,000 annually in a mutual fund. If Tom contributes $2,000 a year to a mutual fund until he retires at 65, and if he were able to defer taxes on automatically reinvested capital gain distributions, Tom would have an additional $9,500 after taxes for his retirement, which is equivalent to about five years’ worth of contributions! His mutual fund investment would add a total of $214,600, after taxes, to his retirement nest egg.

Tom’s Cohorts: There are nearly 7 million single working Americans like Tom earning $40,000 or more and who are not offered or are not eligible to participate in a defined contribution retirement plan at work.

Note: Hypothetical example. Assumes an annual rate of return of 5%; with dividends contributing 1%; realized capital gains, 3%; and unrealized capital gains, 1%. Capital gains and dividends are taxed at 15% federal rate (no state taxes considered). Accumulations are after-tax values at end of horizon indicated. Detail may not add to total because of rounding. Similar to Joint Economic Committee's April 2004 analysis.

Source: Investment Company Institute