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A New Year’s Resolution worth keeping |
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Have you declared your New Year’s resolution yet? How about a resolution that is not only easy to
implement, but is also easy to keep and will benefit you and your loved ones for years to come?
Sounds too good to be true?
Resolve to increase the amount you are saving in your 401(k)! It’s quick and easy, usually taking nothing more than filling out a form. It is also one of the best steps you can take to build your retirement nest egg and achieve your financial dreams. Even though you may think you have no additional money to devote to your 401(k) deferral, it is probably not that hard to find an additional one or two percent. You probably won’t miss it if you factor in tax savings or some minor lifestyle adjustments. Why should I consider increasing my deferral? It all comes down to having realistic expectations of retirement income sources and formulating a plan. Social Security is an important piece of the plan; however, you know that it is not nearly enough by itself. When you take into account that life spans will increase, adequate retirement savings will be a major determinant of a comfortable retirement. You could conceivably spend 20 to 30 years in retirement, and analysts predict that 75 percent of pre-retirement income will be needed after retirement to maintain the same standard of living. Example: A $50,000 annual salary now means that $37,500 will be required annually post-retirement, requiring a $706,981 savings account.1 How much impact will an extra one or two percent have on my retirement savings? This is where the beauty of compounding comes in. A little extra saved may seem trivial, but the impact over time with compound earnings is surprising. Example: $1 a day will grow to over $41,000 at 8 percent, or to over $67,000 at 10 percent after 30 years.
Where will I find the extra one or two percent? Refer to the above examples for ideas or consider cutting other drains on your dollars. ATM fees, vending machines, fast food and revolving interest can be reduced, with the money redirected into your 401(k). The bottom line – examination of your monthly spending can yield more investment dollars. The key is raising your savings program in increments. Look at your current deferral rate and raise it by one or two percent. If you received a raise, or know you will receive one, consider an extra percent or two on top of that. And plan to increase your deferral again with future raises. By maximizing your deferral rate, your savings program builds momentum. You not only take advantage of a possible company match, you move toward financial independence in your golden years. 1 Assumes 20 years in retirement,3.1 percent annual inflation,8 percent annual return. | |||||||||||||||||||
