This weekend most of the nation will move their clocks forward one hour to adjust for daylight savings time; what we call "spring forward". I would like to suggest that you use this as a reminder to spring forward your 401(k) contributions and increase the amount you are contributing. When was the last time you increased the percentage that you are contributing to your 401(k)? Work retirement plans like 401(k)s are usually set up so your contribution is taken as a percentage of your salary. For example, if you make $50,000 and elected to contribute 5% to your 401(k) plan, your contributions will add up to $2,500 per year. A contribution increase would mean you decide to contribute a larger percentage of your income.
Because most companies do not offer pensions anymore and you cannot rely on Social Security to provide a major portion of your retirement income, more of the responsibility of providing yourself a retirement income falls on you. Most workers need to increase the amount they contribute to their 401(k) plan over time in order to reach their retirement goals. Many workers contribute a small percentage of salary early in their career when they have a smaller salary. But as their career progresses and their salary increases, they can afford to make larger contributions.
Lots of employers now offer an auto‐increase contribution feature with their 401(k). Each year, the auto‐increase will automatically raise your contribution percentage by a specified amount – often by 1%. We do a lot of work with Eli Lilly employees and Lilly offers an annual increase option in a percentage that the employee specifies. Your contribution percentage then automatically increases by that percentage each year. The increases continue annually until you reach your target contribution percentage rate that you set. You may be surprised by the enormous impact that a small increase on an annual basis can have on your savings amount at retirement. Let's look at an example:
Marie is 35 years old. She has $50,000 in her 401(k). Her annual salary is $72,000 and we assume a salary increase of 2% per year during her career. She contributes 6% to her 401(k) and her employer matches 100% up to a maximum employee contribution of 6%. She plans to retire in 30 years at age 65. We're going to assume her 401(k) averages a 7% annual return. At age 65 she will have accumulated $1,419,152.
Marie signs up for her employer's auto‐increase contribution option and increases her contribution each year automatically by 1%. So the next year she contributes 1%, or $720 more to her 401(k). That's $60 a month or $15 a week. Even if she doesn't get a pay raise this year she can swing that increase. Then her contribution automatically increases each year until she is contributing 25%, the target amount that she chose. At age 65 her 401(k) will have grown to $2,188,287, $769,135 more than if she didn't use the auto increase.
(Source: http://www.preparewithpru.com/shared/content/contribution‐accelerator‐calculator.php) This is a hypothetical example for illustrative purposes only and is not intended to represent any specific investment. This example does not consider any costs associated with investing. Investments involve risk and you may incur a profit or a loss. Seeking higher rates of return involves higher risks.
Auto‐increase is a terrific tool and encompasses four concepts at the heart of any sound financial and investment plan:
- Pay yourself first
- Delayed gratification
So go check your 401(k) and find a way to get that extra 1% (or more) in each year. This weekend don't just spring your clocks forward, spring your retirement forward by signing up for auto‐increase on your 401(k).