Why You Need to Save Another One Percent Right Now
According to a survey at GoBankingRates, Generation X and Y are way behind on saving for retirement. Interestingly, Mrs. O.G. just said the other day she fears we’re in the same category (I of course took that opportunity to tell her would could always use a few less trips to the mall and a few more dollars in the investing account…). The reality is that there are many competing priorities for people our age: student and car loans, mortgages, and credit cards that seem to always linger eat up a chunk of the budget. Add to that the daily living expenses of having two children and maintaining a home and it seems like there’s always too much month and not enough money. And don’t get me started on day care costs….jeesh.
An old Chinese proverb states, “The best time to plant a tree was ten years ago. The second best time is today.” I’d like to start a campaign to make that the mantra for retirement savings. We should’ve all started saving back in our early 20’s, but not all of us did. And now some of us have to play a little catch up. Waiting until tomorrow to begin is too late. You need to start today.
Let’s assume you make $50,000 per year and are already dutifully saving 3 percent into your company’s 401(k) plan. Maybe you’re lucky and they match 50 percent of that, so you’re getting 4.5 percent of your compensation saved every year. Pretty sweet, right? Have you figured out approximately how much you’ll have in 35 years when you turn 65? Allow me:
Here are my assumptions, if you’re playing the home game: $50,000 per year income (3 percent pay raises per year) saving 3 percent ($1,500 per year) and getting 1.5 percent matched ($750 per year). Let’s assume you’re not quite Dave Ramsey and can’t get 12 percent year, but maybe you can average 8 percent if you keep your fingers out of it. How much? Drum roll please…you’ll have about $575,000. That’s not a bad number, considering you’re total investment over the next 35 years would have only been $136,000.
Increase your savings by 1 percent.
Now, how much more money would that create? Most people look at a 1 percent increase as an absolute number, as in, “If I increase my 401(k) from 3 percent to 4 percent, I’ve increased it by only one percent. Big deal. That won’t change anything.” I’d rather you focus on the geometric increase: 4 percent from 3 percent is a whopping 33 percent increase in your savings rate! That’s huge! How huge? Assume our previous same example, only instead of contributing 3 percent and getting a 1.5 percent match, we contribute 4 percent with now a 2 percent match…now your 35 year total is $772,000! And how much did that cost you this week?
It only cost you a tiny $9.62. Wait….I forgot to exclude taxes because you’re saving into your 401k plan. So let’s say it’s about $7.50. Give or take.
Can you afford not to do this? Do it right now.
P.S. I know that a lot of 401(k) plans do an “automatic” increase each year too, so that’s worth looking at. Just for giggles I calculated what would it be if you make $50,000 a year, contribute 4% this year and raise it each year by 0.5% until you get to 15%. Any guesses on how much you’d have after 35 years? Post your best guess (no cheating) in the comments below. I’ll answer in a few days…
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