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I have mentioned this before, but I think it is such a valuable piece of advice. When I first started to work for the federal government, a coworker advised me to increase my 401(k) contribution each year when I received a raise at work.
He explained that if I was able to increase my contributions by even 1% each year, I would be able to reach retirement that much easier.
I remember at that time, I was barely making ends meet. I was in my 20s, and peer pressure was coming at me from every direction. The last thing I wanted to think about was saving for retirement.
I wanted to eat at restaurants without restriction. I wanted to upgrade my old, beat up car. Everyone was posting pictures of their latest trips. I wanted to travel and have similar experiences. The thought of increasing my 401(k) contributions at the time sounded so boring.
However, looking back, I regret not doing so. I frivolously spent more money that I should have over the years. I wish I had saved instead.
What If…
I thought it would be really interesting to see what would have happened if I had increased my contributions during those years. So, I ran the numbers and used six different salaries, starting at $25,000 and incrementally increasing up to $150,000. I used the starting age of investing at 22, ending at age 66.
The Assumptions
Since the average 401(k) employer provides a match up to 3%, I used a 6% yearly contribution figure. I also used a 6% annual investment return based on a 60/40 stock-to-bond split, in conjunction with compounding interest on the investment annually. The blue bars show this 6% annual return, which is essentially the baseline.
For the red bars, I used the assumption that the savings rate began at 6% at the age of 22 and grew 1% annually, until a maximum of 50% at the age of 66. The figures below do not factor in inflation or salary increases.
Here’s how much money you would have saved by age 66 assuming a salary of:
$25,000
With a 6% allocation: $338,262
With an increasing allocation of 1% each year, until you hit 50% at age 66: $1,079,129
Total difference in savings: $740,867
$50,000
With a 6% allocation: $676,524
With an increasing allocation of 1% each year, until you hit 50% at age 66: $2,158,258
Total difference in savings: $1,481,734.37
$75,000
With a 6% allocation: $1,014,786
With an increasing allocation of 1% each year, until you hit 50% at age 66: $3,237,388
Total difference in savings: $2,222,601
$100,000
With a 6% allocation: $1,353,048
With an increasing allocation of 1% each year, until you hit 50% at age 66: $4,316,517
Total difference in savings: $2,963,468
$125,000
With a 6% allocation: $1,691,310
With an increasing allocation of 1% each year, until you hit 50% at age 66: $5,395,646
Total difference in savings: $3,704,335
$150,000
With a 6% allocation: $2,029,573
With an increasing allocation of 1% each year, until you hit 50% at age 66: $6,474,776
Total difference in savings: $4,445,203
Incremental Changes & Savings
Don’t be discouraged if you are no longer 22 years old. The point was not to make you feel bad, but to show you how incremental savings changes can add up over time. Even if you can’t save 50% by the time you’re 66, you should still be able to find an additional 1% to put towards savings.
The average raise in 2016 was 2.8%. In 2017, the average raise was 3.0%. Experts are forecasting that the average raise will be 3.0% again in 2018. That means that over the last three years, that you should have received an increase in your paycheck by almost 10%.
Since inflation has been so low (1.28% in 2016), you should have been able to save at least 1%, if not at least 3%, over the last 3 years.
I was recently looking at Personal Capital, where I review my expenses. I was trying to determine if there was any fat in my budget, even though I have a savings rate that exceeds 65%. There was. I still eat at restaurants too much.
I encourage you to start the new year off right and look for ways to increase your savings in 2018. Even if it is only increasing your savings by 1%, I showed you above how much of a difference that can actually make.
Very cool analysis! It really shows how just incremental improvement can really help to skyrocket your savings. Good luck cutting out restaurant spending.
Justin @ Atypical Life recently posted…Visualize Your Budget With Prowess Using A Sankey Diagram
Thanks for stopping by Justin!!! I was amazed at the numbers and the incremental difference that it makes over time.
Nice article. Reinforces power of compounding. Ever since I started making 401(k) contribution, I have setup an auto increase of 1%. I started at 35 🙁
BTW, In all my computations I assume 3-4% ROI. Better to be conservative and over achieve.
dividendgeek recently posted…10-Year Dividend Growers with dividend increase (Dec 04 – Dec 08)
Thanks for sharing Dividend Geek!!! That’s awesome that you have the ability to auto increase. That seems like an awesome tool to have available. I definitely wish my work had offered that 🙂
I automate my savings by contributing 6% of my salary to my retirement plan an get the 3% matching from my employer. When I get a raise, my 6% contribution is increasing at the same rat too.
It’s amazing what an extra 1% can do for you. Sometimes cutting the fat from my budget is not as fun as finding and getting free money. One of my goals for 2018 is to get 1% of my salary in free money. It’s much more motivating to get free money than to trim the fat.
Leo T. Ly @ isaved5k.com recently posted…The Best Holiday Gifts To Give Yourself
Hahhaa…free money is definitely the way to go if you can find it 🙂 The dividends that I get from passive index funds are start to really make a difference which is making me very happy 🙂
Nice review. I maxed out my 401K this year in Oct. I have went ahead an increased my contribution going into 2018. I hope to have it maxed out by September next year.
FIbythecommonguy recently posted…DIY Toilet Install
Wow congrats on maxing out your 401k. By maxing it out early, do you miss out on the match from your employer for the rest of the year? I know in the gov’t if you max out early that they stop contributing.
We took my whole raise last year and upped my 401k and Roth contributions and have been doing that since we became debt free. Some of the raises have gone to starting 529s for the kiddos.
In 2018 we hope to open a brokerage account and throw money in there plus up our mortgage overpayment.
Budget On a Stick recently posted…Infinite Worlds In One Place
Thanks for sharing Budget on a Stick!!! Sounds like 2017 was a great year for you and 2018 will be even better. Congrats!!!
Oh wow, just goes to show us how important it is to start early when it comes to saving for retirement…
Wes recently posted…November 2017 Blog Numbers
I definitely agree Wes!!! The earlier you start the better off you will be 🙂
It’s crazy how such a small change makes a huge difference!
If ppl aren’t up for saving, I’m sure anyone can make efforts to earn just a tad bit more to hit that 1% increase
Nice job with the post. It’s definitely solid advice
fin$avvy panda @ finsavvypanda.com recently posted…10 Ways to Develop a Rich Mindset for 2018! — #10 is Mind-Blowing!
Thanks for stopping by!!! It’s the little things that add up over time. I was shocked myself to see how the increases made a difference over time.
From my first year as a full-time worker with a 401k, I started increasing my contribution by 1% when I got a raise. As I recall, I got 6 month and 18 month raises in addition to the annual raises so that’s 4 raises in 30 months so it went up pretty quickly. I don’t know how I got the idea (this was pre-internet) but at the time I thought if I am getting a 4% raise, I can set aside 1% for the 401k and my take-home pay will still go up.
I do recall that when I first started, I had to contribute 6% to max out the company match. That made living expenses a little tight but the frequent raises at the beginning meant I was net positive cash-flow after six months of work while contributing 7% to my 401k.
That’s awesome to hear. You were definitely ahead of your time. On top of that it looks like you were getting raises very quickly. Sounds like you were providing a lot of value to your employer and they were rewarding 🙂
This was our first year maxing out two 401Ks and two IRAs. Felt amazing and holy crap your networth shoots up quick doing that. Pretty cool to see what just a small increase can do though.
Grant @ Life Prep Couple recently posted…Avoiding Groupthink With 4 Tips
Thanks for sharing Grant!!! I couldn’t agree more. It’s amazing seeing how quickly your net worth rises when you are maxing things out. I am still amazed looking at my accounts and thinking are these numbers real.
Holy smokes those are some impressive figures!
My job path in my 20s and 30s was very un-traditional and I lived close to poverty level. But a few years after Mr. Groovy and I married we began accelerating the 401k/403b each year by 1 or 2%, and even more, until we maxed out. The last few years we got the bump for being over 50. I needed a little arm-twisting on the maxing out but once I got on board, I was sold.
Mrs. Groovy recently posted…Egotrage: Taking a Step Back Socially to Advance Two Steps Financially
Thanks for sharing Mrs. Groovy!!! The bump over 50 is very nice 🙂 I would be curious to see how much people would put towards retirement if they weren’t capped at all. I think it’d be fun to see those numbers 🙂
I haven’t increased them yet, but I am focusing on whether I open up a 457 or add that money to my Roth IRA. Tough question…..
Jason recently posted…Wineries, Wineries, and More Wineries
Back in the day I would put money up to the match in my 401k and then max out my Roth IRA, before going back to my 401k. That way if I ever needed the money I could pull the contribution out of my Roth IRA. Plus diversification of taxes 🙂
I always tell the folks under me when they get their raise to put at least 1% of it into their 401k until it is maxed out.
Such smart advice!!! I think during every promotion ceremony HR should sit in and share that info 🙂
What a difference 1% a year makes! Unfortunately I’m no longer 22, or even 62, but if I could go back and do it again, I would definitely make that annual increase. That’s a great chart to make the point crystal clear.
Gary @ Super Saving Tips recently posted…17 Year End Tax Moves & 1 More Thing to Save Money
Thanks for stopping by Gary!!! I definitely agree that when you see it on paper it’s really hard to argue with the numbers. Even a small increment helps 🙂
It is so true. Starting early and making incremental improvements to your savings rate has a huge effect. I fell victim to the same pressures in my 20’s and definitely left some money on the table. Tom
Tom @ Dividends Diversify recently posted…Shout Out To Ya
Thanks for sharing Tom!!! Peer pressure is definitely real and hard to shake at times. I definitely would be much further ahead 🙁
Good post showing how a little change each year can have such a large impact! My first few years of working I always did 10% but now wish I would have tried harder to get to the max sooner. It is easy to not miss the money since it comes out of the paycheck first.
Good luck cutting back on the restaurants!
I definitely agree!!! I definitely should have done more in the beginning!!!
Almost like compound interest compounded again. Great post!
Pennies and Dollars recently posted…How Starting a Business Affected My Personal Finance
Exactly!!! Compound interest is such a powerful tool!!!
I’m in the same position that you were in. I now know I need to be saving and I’m cutting down on restaurants, trips, expensive things, etc. My friends call me cheap, but I call it being frugal. Thanks for more added motivation because in all honesty it is difficult at times. There are so many things seeking to hurt my finances haha!
Larry Holmes recently posted…AAA Vs Allstate
Thanks for sharing Larry!!! Restaurants are definitely a weakness but I try to keep my eye on the prize 🙂