#52 | invest for your future self
Please don't roll your eyes at me for this one 😂
It’s the end of the year, which hopefully means a raise and/or a bonus for lots of you, making it the perfect time to discuss my favorite topic: saving for retirement!
When I started working my first corporate job, I enrolled in my 401k immediately. My company matched 50% of my contributions, up to 6%, and their contributions vested immediately (rare!). I was making $42,000 per year, and I think I contributed the full 6% but don’t hold me to that!
But assuming I did, that meant my 401k was getting $3,780 each year to fund my retirement. Which doesn’t feel like that much, until you take into account compound interest. If I never put another cent into that 401k and retired at 65 years old, that 401k would have $43,685 in it.1
I didn’t stop contributing, of course, and over the years increased my contribution until I was finally able to max out the federal limit a few years ago. Making more money helped with that, of course, but I still regularly increased my contribution when I was making less.
You know that story about a frog boiling in water? That’s what I did to myself with my 401k. Two to three times a year I would increase my contribution by 1% — it was forward progress while still being small enough that I didn’t feel it in my paycheck.
My favorite times to increase the percentage, in order:
When I got a raise. Usually this happened once a year, but every so often I’d get a new job mid-year or an off-cycle raise. I would immediately log into my account and add one percent (or more if the raise was really big!) before I ever saw my new paycheck amount. It was a win-win: I still got a larger paycheck while saving more at the same time.
On my birthday. This felt like a great little way to mark another year, especially another year on the trek to retirement. Yes, my paychecks were slightly smaller but 1% was manageable. And remember, 401k contributions are made pre-tax so $20 less in my paycheck actually meant $25+ was added to my 401k.
If my spending was noticeably lower than my earnings. This did not happen regularly, but as an avid budgeter (10+ years with YNAB!) I could identify when I was ahead on my bills by enough to create a cushion. I definitely spent that cushion in other ways too, but the most responsible thing I did was bump up my retirement savings.
I’ve had lots of different 401k plans over the years, and some of them let you set up automatic increases. I highly recommend this if you can, because then you only have to decide once! If you can’t automate, at least put it on your calendar if you want to remember to do it.
If you’re not convinced, let’s revisit the original scenario: investing 9% of my $42,000 salary for one year and never contributing again results in $43,685 at retirement. If I continue to invest 9% every year on the same salary, I would have $665,093 at retirement. And if I increase my contributions by 1% every year (capping it at 15% once I got there) I would have $1,082,154 by retirement.
🚨 That’s a difference of more than a million dollars!!! 🚨
This is an overly simplified calculation, of course — presumably we continue to earn more as we advance in our careers, we might switch to a company that has a better (or worse!) 401k match, we might even have some low or no-earning years thrown in. It’s not linear but it does show the impact a small increase can make over the span of our careers.
So go forth, increase those contributions, and I will see y’all when we’re rich in retirement 🥳
ICYMI: Recent Posts to Catch Up On
From the Archives: Older Posts I Still Stand By
I’m assuming a 6% rate of return, which is fairly conservative when looking at historic market returns, and 42 years in the market (I was 23 when I started contributing, and assuming a retirement age of 65).