What if I told you there was an easy way to add nearly $50,000 to your retirement savings and it would only cost you $42 per month? Well, that's exactly what can happen if you raise your deferral percentage on your retirement account -- a move 14% of Americans have already made this year, according to a Principal study. Below, we'll take a look at why this makes such a difference for your retirement and where you can find the extra cash to make it happen.
A 1% increase can mean tens of thousands of dollars extra in retirement
You don't have to raise your contributions that significantly to see a noticeable difference in your retirement account balance. If you earn $50,000 per year and put 9%, or about $375 per month, away for retirement every month for 30 years, you'd end up with over $438,500, assuming you earned a 7% average annual rate of return.
If you raised your contribution to 10% of your salary, or about $417 per month, you'd end up with over $487,600 at the end of 30 years, all other factors being the same. That's a difference of over $49,000 in your final balance, despite you only contributing an additional $15,120 of your own money. For many retirees, that extra $49,000 is enough to cover a year or more of living expenses, and it only cost you $42 per month.
And this is only one example. If you earn more than $50,000 per year, you raise your contributions by more than 1% of your salary, or you save for longer than 30 years, you could end up with even more money than in our example above. That's worth going without a few extra dollars per month, isn't it?
How to increase your deferral percentage
When you're ready to increase your retirement deferral percentage, all you have to do is change this in your online retirement account or by talking to your company's HR department or your plan administrator. But before you can do that, you need to understand how increasing your deferral percentage will affect your household's cash flow and how much money you can afford to spare.
It might be difficult to increase your retirement contributions right now, particularly if you've lost your job due to the pandemic. But if you are still employed and you don't need all your money to cover your living expenses, do the math to see how much saving 1% more for retirement would affect your finances, both today and in retirement. If you're comfortable with that and you'd like to save even more, do the same for 2%, and so on until you find the amount that works best for you.
You might be able to save even more per month if you're willing to cut spending on nonessential items. Review your bank and credit card statements from the last several months to look for areas where you might be able to cut back. Check for unused memberships or subscriptions you could cancel and consider cutting back on takeout and cooking more at home if you're not doing this already. You should also look out for coupons to help you save on your everyday purchases. Check your local newspaper and search online too.
If you can't afford to raise your retirement contributions right now, that's okay. But consider doing so in the future when you feel financially stable again. Even if you can only set aside a few extra dollars per month, it can still make a significant difference in your retirement balance if you stick with it.