What’s the value of 1? If you guessed $1 million then it’s likely you’re in on a little-known secret that helps the most savvy of savers effectively prepare for their golden years.
It’s true. Adding just a little bit more—even as little as 1%—to your retirement plan contributions can add up to a significant amount over time.
How does it work? Let’s take a look at the numbers.
Say Saver Sally is 25 years old and earns $40,000 per year. If she starts saving 10% of her income at age 25 and retires at age 65, she’ll have $1,253,227 saved when she retires. If she boosts that contribution by just 1%, though, to 11%, she’ll have $1,378,552. That’s an additional $119,336 available to enjoy during retirement.
That’s just assuming she bumps her contribution only once. Many retirement savers increase their annual contribution when they receive a raise, a promotion, or find a little extra wiggle room in their budgets (like after paying off their pesky student loans, for instance).
With that said, a one-time contribution boost is just the beginning. Here’s how Sally’s savings would add up over time if she added 1% to her savings each year, until she reached a 20% contribution level. At age 65, Sally’s retirement account would have accumulated a whopping $2,210,334. That’s almost a million dollars more than if she had kept her contributions at the 10% level throughout her career.
Bumping an annual contribution by 1% does mean Sally will be putting more money away. Still, the overall cost is often significantly less than one would expect. The jump from a 10% to an 11% contribution, for example, is $532 per year. That’s just $10.23 additional per week.
Even better, most 403(b) and other qualified plan contributions are made on a pretax basis. That means that most workers will realize a decrease in their take-home pay that’s less than the amount of their contribution.
Many workers feel the most cash-strapped early in their careers, and yet that can also be the most effective time to start saving. Even if you’re further along in your career, you can still benefit from the 1% accelerated contribution strategy. That extra contribution may be just enough to allow for more travel, hobbies, or new business ventures.
If you feel this way, you’re far from alone. This mindset is perhaps why a full two in five Baby Boomers—those poised to start retirement any day now—haven’t yet saved a thing for retirement. Among those who have, more than a third have saved less than $100,000.
Still, it doesn’t have to be that way. Small, simple lifestyle changes can create large savings opportunities. To come up with her $333.33 per month contribution (10% of her $40,000 salary), Sally Saver may choose to make small or large changes to reach her goals. For example, she may:
In the end, it’s a savvy strategy to start saving at the level where you’re comfortable, but to then push yourself to save more as often as you can. That could be a 1% increase but it could also be more. You could increase your contributions once a year, once a quarter, or even once a month. Whichever strategy you choose, know that the more you stash away and the sooner you start, the faster you’ll reach your retirement goals.
Source: AIG - AIG Retirement Services
*All data assumes a 3% annual salary increase, a 7% return on investments, and that available catch-up contribution limits will be used after age 50. Data is calculated using the retirement account contribution accelerator calculator at dinkytown.net.