Auto-Increase: Today’s Financial Planning Hack
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Auto-Increase: Today’s Financial Planning Hack
What if I can show you a way to substantially increase your retirement savings, and you wouldn’t even notice? Would you like that? Well then, you came to the right place. In 5 quick minutes, you’ll see the power “a little bit” can have on retirement. You’ll learn the answer to, how to retire a millionaire, and how to increase your retirement savings. The simple answer is 1% at a time. Let me explain.
A lot of employer-sponsored retirement plans (i.e. 401(k)’s) offer a neat feature called the automatic increase option, or the auto increase retirement option. Effectively, this increases your 401(k) contributions by 1% a year. In 2020, if you were contributing 10% of your salary to your 401(k), in 2021 you’d be contributing 11%. Easy enough, right? I know what you’re thinking, “That’s all I need to do to retire with more money? It’s that easy? I can do it.”
Well, the short answer is yes!
Thanks for reading! Just kidding, I’ll take a few more minutes of your time to elaborate.
For starters, we can all agree that typically increasing your 401(k) by one percent won’t drastically change our lives, right? Especially, if you’re getting annual increases of at least 1% (and in most years, that’s easily attainable). Now let’s have some fun with numbers, shall we?
Example 1:
- 35-year-old making $120,000/yr.
- 7% compound return.
- 30 years working.
- Puts 10% away in their 401(k), or $1,000/mo.
This person would retire with $1,219,971 in their retirement accounts. By the 4% withdrawal rule, they’d comfortably be able to pull out $48,798 from their accounts forever.
Example 2:
- 35-year-old making $120,000/yr.
- 7% compound return.
- 30 years working.
- Puts 11% away in their 401(k), or $1,100/mo.
What do you think this extra 1% means over 30 years? It’s only $100 a month. Can’t be much, right? Well, that extra percent equates to $1,341,968 in retirement accounts. Or an increase of $53,678 in retirement income, based on the 4% rule.
Example 3:
- 35-year-old making $120,000/yr.
- 7% compound return.
- 30 years working.
- Puts 12% away in their 401(k), or $1,200/mo.
What about a percent on top of that, what difference would that make? Well, you’d retire with $1,463,965, or $58,558 using the 4% income rule.
Example 4:
- 35-year-old making $120,000/yr.
- 7% compound return.
- 30 years working.
- Puts 15% away in their 401(k), or $1,500/mo.
But wait, there’s more! If you were able to go all the way to 5% additional what impact would that have over 30 years? A whopping $1,829,956 in your retirement accounts, or about $609,985 additional retirement dollars. From an income standpoint that puts you at around $73,198 using our 4% drawdown rule. That equates to $24,400 additional dollars to spend a year in retirement.
Staggering stuff, right? Keep in mind this doesn’t include the fact your income is usually going up each year, thus your percentage is on a greater figure than the previous year. This has a double impact and makes the figures look even greater.
What if you don’t have a 401(k) or the auto increase retirement feature?
Not everyone has an employer-sponsored plan, or has this feature. What should these individuals do? Sadly, this nifty hack can’t be automated. So, that said, I’d recommend one of two things. One, put a reminder in your calendar every January, 1st (or every comp review time) to increase 1% minimum. Your other option would be to give this power to others, preferably your financial planner (over your mailman 😊). Let them know you want this done every year and have them act as a catalyst for you.
If you don’t have a 401(k), it just means you have to manualize this a little more using other retirement vehicles. Not a big deal really, although it means more ways to forget, and more effort. But isn’t your retirement worth it?
What happens when you max out your 401(k)?
The last, logical question that comes to mind is what happens when you max out your 401(k)? For starters, kudos to you. After that, it’s time to get creative. Work with your team of professionals to see what else you can do. Can you do a Roth IRA contribution (or backdoor Roth contribution) for you or your spouse? Are other retirement vehicles an option for you? What about a non-retirement investment account? The reality is, it doesn’t matter much for this impact; the math works just the same. As our favorite shoe brand suggests, “Just Do It!”
1 Potato, 2 Potato, 3 Potato, 4.
Well folks, there you have it. A great way to better position yourself for retirement by making small sacrifices. And, these steps can really add up and put you in a substantially better position come retirement. So, what’s retirement worth to you?
Hope you enjoyed this quick auto-increase retirement hack. Wishing you all a great week and as always stay wealthy, stay healthy, and stay happy!
Hypothetical figures are used for illustrative purposes only. Investing involves risk and there is no guarantee of a profit.
