For many retirement plan savers, we frequently set a plan in place and leave it alone. Hopefully at a minimum our plan included participating in the plan. But what if we just saved up to the match? What if we put in only what we could afford five years ago? What if we have gotten a raise? What if our income has gone up? What if our expenses have gone down?
There are a lot of “what-ifs”. For most savers that have taken that initial step (or if you are automatically enrolled, your employer has done it for you), the next thing to do is figure out how much you need to be saving and continually improve upon that savings rate. Consider a few examples: Employee A enrolled at 5% to take advantage of their company match. They make $40,000 a year. They are putting in $2,000 a year out of their own paycheck. Employee B enrolled at the same amount and makes the same. She increases her deferral rate by 1% per year.
After 5 years, Employee B is now deferring 10% of her paycheck or $4,000 a year. She has doubled the savings rate of her colleague who hasn’t changed his since he started. She also is now living off of $36,000 a year versus $38,000. This is a key, frequently unacknowledged, advantage of retirement savings plans. It forces Employee B to better budget her spending during her working years which lowers the amount she needs to fund in retirement.
This is a basic example of how paying your future self can pay off over time without breaking the bank in any given year. As we look forward to 2021 (whew!), consider giving your future self a raise and defer more into your company retirement plan.