Increase Your 401k Contributions

by Scott Sery on August 14, 2012

One of the easiest places to accumulate money for retirement is in a 401k.  As easy as they are to use, many people still neglect them.  Rather than worry about how you will live without that extra 3% in your paycheck, take some time to figure out how much more you will have during retirement if you start to increase your savings by just a little each year.

The 401k is an option offered by the employer so the employee can save for retirement.  The contributions are deposited pre-tax and taken right out of the paycheck.  There is no need to worry about remembering to make them.  The money saved can help to supplement retirement, or for those who are not counting on Social Security, it can be all of the retirement savings.  In today’s environment it is important to save money.  By making regular contributions to an employer plan, at least enough to get the match, a person can save for the long term and will be able to enjoy his or her retirement.

Too often people think that just saving a little bit will help them to get through retirement.  And most people find out when they are in their late 50’s that they have not saved nearly enough.  Instead of finding out you have too little, plan to find out you have more than you need.

Increasing savings does not have to be drastic.  For example, take someone who at age 35 is making $50,000 per year, and saving just 3% of his income (he also gets the employer 401k match of 3%).  So far he has saved $7,000.  He receives cost of living raises of 3% each year, and gets an average of 7% rate of return, after 25 years (when he reaches age 60) he will have $172,148 saved (not including employer matches).  If he were to increase his contribution by just 1%, he could boost those savings to $223,187.  Reducing his bi-weekly take-home pay by $15 per paycheck he is able to save a little over $51,000 extra dollars for retirement.

$223,187 seems like a lot of money.  But considering many people will live past age 90, there is no way he could sustain himself for over 30 years without some other sort of aid.  Instead, increasing those savings by 1% each year, until he hits a maximum of 16%, will help dramatically.  The next 25 working years will allow him to set aside an additional $521,000; a total of just over $693,000 in his account (plus the employer match).  Even though more will be going to his retirement account, the cost of living increases will offset that and his take-home pay will continue to increase.  Check out the NYT for a great interactive retirement calculator and do your own estimates.

Saving money is a great way to thoroughly enjoy your retirement.  Saving even more is a way to make sure you can do everything you desire during retirement.  With the future of Social Security uncertain, now is the time to step up contributions to a retirement account.  If nothing else, increase your contributions by 1% this year.  I’m certain you will not miss those few dollars in each paycheck.  Next year, try to do the same.  In the end your lifestyle now won’t change, but your retirement lifestyle will be far better.

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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website Sery Content Development
  • I was JUST going over this with one of my junior colleagues. The best time to bump up your rate is when you get a raise because you don’t even notice that you deferred the money. It me a long time, but I worked my contribution until it got up to the max.

  • John S.

    Thanks for the post. I know that some people don’t want to save in their 401k because they say they can’t afford to. The nice thing though is that by doing so is that you get the benefit of lowering your taxable income which is always helpful. Additionally, free money (the match) is always great to get!

  • While we’ve been focusing on paying off debt we’ve definitely transitioned and bit and have been starting to save more in my wife’s 401k (I don’t have that option). It’s a great point to increase contributions each year and it will be something we’ll focus on doing. I’d rather try a 2% bump and get to the 17k/year limit sooner rather than later.

  • John

    Thanks for the post. I agree that you probably will not miss the small amount that comes out of your paycheck via the 401K contribution. Plus, you get the added benefit of lowering your taxable income and free money (through the match) to boot!

  • Veronica @ Pelican on Money

    Scott, great tips! I’m so guilty of not saving.. shame on me! I guess it’s never too late to start? Or wait… that can’t be..

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