It’s the beginning of the year, and for many, that means performance reviews. While every review doesn’t end with a promotion, it often ends with a 2-3% cost of living adjustment. A popular retirement planning recommendation is to increase your 401k contribution by 1%. If you follow the cost of living adjustment strategyy, you will incrementally increase your retirement savings while still getting a few extra dollars in your paycheck every week. Even if you don’t receive a cost of living adjustment or raise, increasing your contribution is probably still possible.
So let’s try to make this feel real. If you earn $100,000 a year, a 1% raise is $1,000. If you are paid every week this is $19.23 per paycheck. Most people can find $20 of savings in their weekly budget. If you go out to dinner once a week, skipping dessert would cover this. A small reduction in your cable package or making your own coffee could also cover this. It doesn’t matter where the savings come from, but $20 a week is a realistic resolution most of us can achieve.
What’s the benefit of this? Why would I inconvenience my life for $20 a week? If you invest $20 a week for 30 years at a 10% return, you would have an extra $197,888.65 at retirement. This is like working for 2 extra years and saving 100% of your salary! If travel is your goal, you could take a $10,000 vacation every year for 20 years in retirement. Scraping up an extra $20 a week, that 1%, can make the difference for the successful retirement you deserve.
There’s a few other benefits as well. Retirement plans are funded directly from payroll, so you will never even be tempted to spend this money. If you participate in a traditional 401k or 403b, you will also reduce you tax bill at year-end. If you increase it just 1% every year, it won’t take long until you are deferring a meaningful part of your salary and potentially maxing out your contributions.
This is a small step towards a successful retirement. As the saying goes, the best way to eat an elephant is one bite at a time. A small annual increase in your contributions will generate elephant-sized savings down the road. How much risk you take or the time until retirement can greatly impact your asset values. There is also inflation and future expenses like healthcare costs to consider. Working with a CERTIFIED FINANCIAL PLANNERTM professional can help refine these estimates.
Start the New Year with a plan already in motion. Doing small things well tend to add up better than grand plans that never materialize. Lastly, no one benefits more than you from your own planning!