It is 2015, and pensions are out, 401k’s are in.
The shifting retirement landscape has come to the point where companies rarely offer pensions for employees anymore. Instead, 401k plans are the preferred choice. Contributing to your employer-sponsored 401k plan to get the full company match is a given. If they contribute 50 cents on the dollar for the first 6% then you put in 6% of your paycheck and the employer contributes 3%. A total of 9%. Not too shabby.
Contrary to many news outlets, companies are handing out raises to employees. It could be in the form of an annual 3% raise. A promotion can often times carry a raise of 6% to 20%. No matter how big or small the raise is, you SHOULD consider raising your 401k contribution beyond the full company match.
It is the end of your company’s fiscal year and they award you a 3% raise (this is how employers make sure their employee salaries keep up with inflation). Let’s say you contribute 6% of your paycheck and the employer matches you 3%. You have a total of 9% of your paycheck being contributed to your 401k. If you make $5000 a month this equates to a monthly contribution of $450. If you were to take your 3% raise, increase your 401k contribution by 2%, a total of 8% that YOU are contributing, and add in your employer’s match of 3%, you now have a total of 11% of your paycheck going to your 401k. Now, instead of having $450 a month deposited into your retirement account, the amount leaps up to $550 a month.
Adding 2% of the 3% raise to your 401k contribution still leaves you a little, 1%, increase to your paycheck. You won’t miss the 2%. Why? Because you have already been conditioned to get by on the money you were currently earning.
Small raises to your 401k contribution can pay dividends later in your retirement life. The following link shows you just how much a small increase now can pay you much more in your retirement years.
Budget Smart, Invest Wise