Sunday, May 5, 2013

2% this time

It’s hard to turn a spender into a saver overnight, especially if they have been conditioned by our society to want to spend on consumer goods, even if that means taking on years of retirement-postponing debt.  It's even harder for a working individual to start putting real sums of money away into their retirement account(s). 

If you’re serious about a comfortable retirement at any age, retirement accounts offer significant tax benefits. 
Roth IRAs allow you to invest after-tax money into an account that can grow and be withdrawn starting age 59.5 without tax penalty.  Every working individual who qualifies should have a Roth IRA. 

If you work for a large corporation, chances are that you will be offered a 401(k)/403(b) plan, a salary deferral retirement account that allows you to contribute part of your pre tax income to save up for your retirement.  These accounts allow you to invest pre-tax money that can reduce your reported income with a larger chunk of non-taxed money to start investing with.  These employer sponsored accounts often have an employer match on your contributions, which is like getting a free raise.  You only get taxed on your 401(k)/403(b) account at your income bracket when you start to access your funds at age 59.5.

I have been maxing out my Roth IRA since I opened an account with Vanguard on December 1st, 2011, less than 2 years ago.  I wish I could have started saving for retirement sooner, but that's besides the point.   I would love to also comfortably max out my 401(k) retirement contribution ($17,500) for this fiscal year.  However, this would involve a 401(k) contribution amount of just over $1,458 per month ($17,500 / 12) into my 401K account from my pre-tax income.

Putting away $1,458 per month into a retirement account does not sound very appealing, no matter what your income level is.  Trying to do this all at once starting in the next month could be a drastic lifestyle change for many people, myself included.  Plus, if you’re also aiming to max out your Roth IRA contribution of $458 a month ($5,500 / 12), then you’re looking at putting $1,916 a month into your retirement accounts, not exactly an easy feat to accomplish.   Just thinking about it can sound a bit overwhelming.  

And this isn’t even counting any regular savings or taxable account contributions.

I believe in being relentless with saving and investing.  However, real permanent change takes time and realistic intentions.  Ridiculous and overambitious goals don’t lead lasting results.  Starting small and staying consistent is much more important.

The best way to increase your 401(k) contributions (or any investment contribution) without drastically changing your habits is to make increased contributions slowly. Even a 1% increase in your contribution can lead to dramatic results. 

Look at these examples:
  • A $10 monthly increase in investment contribution compounded at 7% will result in a 10 year future value of $1,730
  • A $100 monthly increase in investment contribution compounded will result in a 10 year future value of $17,308
  • A $500 monthly increase in investment contribution will result in a 10 year future value of $86,542

Do you see where this is going?  Every little bit helps, and all starts to add up surprisingly quickly.

Now go ahead and increase your retirement contribution by 1%.

You won’t notice a 1% difference very much since this portion of your income is automatically sent to your 401(k).  You won’t see it on your paycheck.  You will easily learn to live without that small percentage on your paycheck.   Your money is now automatically working for you, slowly compounding and growing.

Because I am feeling motivated to go BIG this time, I’ve just submitted paperwork to our HR department to increase my 401K contribution…by a whopping 2%!  It’s now at 10% and I will continue to increase it every few months.

I just logged into my mint account and I see that my investments are now at $44,289:
Not too bad considering I’ve only started investing in my retirement accounts for about 1.5 years.  

I know that I should be doing better, and I can do better.  I'm working on it.

You can review the details of the new 2013 Roth IRA and 401K /403B contribution limits here.  In a nutshell, for most individuals (under 50) who qualify, you can contribute $17,500 a year into your 401(k)/403(b) accounts and $5,500 a year into your Roth IRA accounts.  Even if you aren’t offered a retirement plan through your work, there are other options to save for retirement.  Almost every working individual is eligible for a Roth IRATraditional IRA, or SEP IRA.

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