One of the smartest money moves that you can make is to increase by 1% the amount you save for retirement. Now that you’ve paid off your holiday bills, it’s time to reconsider your saving strategy and pay yourself and increase your savings by 1% over last year. Calculate the additional amount and have it deducted from your paycheck so you never see it. If you’re self-employed, have your bank increase your monthly deduction for savings. You won’t miss the money today and you’ll enjoy having more money in the future. Even a small increase can substantially inflate your nest egg over the years, particularly for younger savers who invest more aggressively. But even older, more conservative investors can benefit from this strategy, as the following examples clearly show:
An Extra Quarter-Million Dollars for a 19 year-old Making $30,000 per year
Tim is a 19 year-old high school graduate who manages a fast-food restaurant. He earns $30,000 a year and his employer offers a 100% match on the first 5% of his 401(k) plan contributions. Under his saving strategy Tim currently contributes 4% and decides to take full advantage of his employer’s matching program. His retirement plan is growing at an average of 8.5% per year. The additional percent of contribution with matching will net Tim approximately an extra $294,000 by age 65.
Over a Million Dollars for a 28 year old making $75,000 per year
Mary is a 28 year old college professor who plans to work until age 65. She is currently socking away 10% of her $75,000 salary into her university’s 403(b) plan. She is currently investing her plan in an aggressive portfolio that has averaged 10% growth per year over time. If she would change her saving strategy by raising her contribution level by 1%, she will add nearly a whopping quarter of a million additional dollars to her retirement plan over the next 37 years.
An Extra $6,000 for a 52 year-old making $50,000 per year
Frank is 52 years old and plans to retire at age 60. He is currently contributing 5% of his $50,000 salary into his company’s 401(k) plan and increases his contribution level by 1% in 2012. The investments in his 401(k) plan are growing at about 5 percent per year on average. The additional percent of income will net him approximately another $4,775 over the next 8 years. If he can wait for another 5 years before taking any distributions, then this will grow to nearly $6,100.
Of course, there are several variables that will determine the amount of difference that an additional 1% contribution will make in your plan balance, such as the rate of growth of the investments in the plan and the number of years until retirement. One of the best decisions in changing the saving strategy is to remember that matching contributions by the employer will substantially increase your return. For more information on how you can save most effectively for retirement, contact your financial advisor or company human resources representative or retirement plan consultant.