Do you feel you aren’t saving enough for retirement? Worse, do you feel like what you should be saving for retirement is some huge number you’ll never reach? I think such daunting numbers are what kept a lot of my younger co-workers out of the 401k plan completely.
How about 1% then? Let’s see how much 1% is for a household with a single earner making $50,000 gross per year. For simplicity, let’s say they live in a state without income tax like Texas. If you are paid bi-weekly, putting away $500 pre-tax annually (1%) into a Traditional 401k amounts to an additional $19 reduction per paycheck. If you do live in a state with income tax, the actual paycheck difference will be even smaller.
I know that even this may be hard for some families, but keep in mind this money is still yours and you’re just using the 401k or IRA container to save you taxes. Now, if you’re convinced that you can handle this (and I hope you are), then go right now and either fill out the proper form from Human Resources or go online and submit for a change. As for the investment choice, if you are undecided consider just going for the target-date option for now until you learn more.
Most importantly, increase your contributions by 1% today! Now you can say in 2010 you started saving more for retirement.
Fine Print
I kept things simple above so you don’t get bogged down. You might be satisfied with your current contributions, or you might want to put away more than 1%. Even better, you might get a matching contribution from your company, which will boost your savings even further. On the other hand, what if my 401k has horrible investment options? Or what if you don’t have a 401k/403b at all? You can start an IRA with just a $50 per month commitment with a low-cost provider.
What about Traditional vs. Roth? Check out this Video Post: Roth IRA vs. Traditional IRA.
You may find that if you haven’t maxed out your Roth IRA for 2009 or 2010, then you may want to do that instead of the 401k because Roth IRA contributions can be taken out at any time without penalty (but not earnings).
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Idea: if you received a small salary increase starting Jan 1 (e.g. cost of living adjustment, etc), you could take that entire increase and put it away into an account – you wouldn’t even miss it since your “effective” pay-check will stay the same…
Done! Upped mine from 4% to 10% which puts roughly half of my annual raise toward retirement. Maybe next year I can max it out!
@Jake – Good idea, thanks for sharing.
@Scott – Excellent!
Haha, great minds think alike. I had just updated my 401k deferral this past weekend! My “resolution”, if you will, was to up the amount 1% per year until such time as I am maxing out my 401k contributions allowance. Perhaps if they keep upping the limits I may never get there but at least my saving will improve without a massive ding to the take home pay along the way…
I’ll have to count my contributions to the Employee Stock Purchase Plan. I set aside a significant chunk of money towards that that will start with my first check. Guaranteed 5% return on my investment once the stock is issued only 6 months from now. Maybe I’ll put some of that into my IRA.
It is much easier for those of you in your 20’s to save enough than if you’re first starting in your 40’s. Perhaps 10% should be the goal, but start out small and increase the pain over time…
I have been saving for just a handful of years and am almost at the 6 digit level. I wish I had started much earlier.
Very nice article.
If you had to fund a ROTH IRA or Health Saving Account (HSA, high deductible health account), which one would you fund or maximize first?
Starting in my 20’s I did annually max out my retirement contributions, but since 10% furloughs hit my workplace this last year I drastically cut back on retirement savings. It is much easier to save when you are younger and don’t have kids and a mortgage.
I have about $5600 in my Roth and $14k in my 457(b) (The government 401(k)…basically the same thing except the taxpayer gives me no match. But I’m ok with that. 🙂
Because I am a government employee, I also get a pension. I currently contribute 10% but will increase it to 14% in March and then 18% in July (I get 3.5 increases in March because of annual raise and another 3.5% for cost-of-living increase). I have decided though to move $19k-$20k over to my pension so that I can buy back time. When I’m 55 I will have 35 years in the pension and can retire young with full medical. (please, do not hate! I WORK for my money providing needed services to college kids, faculty, and sometimes the parents). It’s all pretax so I still come out ahead…I just lose a couple of years in my 457(b), but I get my medical much earlier in case I need to leave at 50. I did no increase last year because of furloughs, but I kept my contributions the way they were as if I was not furloughed. I am glad it’s almost over and hopefully new guy in Trenton doesn’t bring them back.
I do wish I had started doing more in my 20s, but when you’re in your 20s, you just want to get ______ and _______. LOL.
Great idea! I increased mine 2%, thanks for the reminder!