You Just Need to Increase Your Savings by 1% Per Year
One of the most common questions people ask about tidying up their finances is how you can save enough for retirement when the numbers are so huge. Life is expensive, and saving 10 percent of your paycheck seems painful at best and impossible at worst.
But it doesn’t have to be that way. Instead of worrying about the 10 percent rule, think of it this way: You can start small and increase your savings by one percent annually. Do this, and by the time you’re ready to retire, you still have a decent-sized egg.
Ten percent is scary. One percent is manageable. It’s enough to change things over time, but small enough so that you don’t feel too much from year to year as long as you stick to the plan.
This is how it works , as detailed by Andrea Coombs of NerdWallet .
Let’s say you start by investing six percent of your salary in a retirement fund when you’re 22 (yes, it can hurt, but you have to make some sacrifices) and make $ 40,000 a year. If you continue to set aside that percentage for decades to come, you will have just over half a million dollars stashed by the age of 67. But if you increase it by one percent every year, you end up with $ 1.4. million, assuming an annual return of six percent, and you stop increasing your savings rate as soon as you hit 20 percent. And that’s not counting the pay raise you’re likely to get, or the overlap with the employer.
This is a big difference, and you will only experience a one percent difference every year. (Interestingly, this Wall Street Journal article suggests that you may not even need to increase all the way to 20 percent. “If 401 (k) plans start at six percent and go up to 15 percent of wages over time, then, on average, employees can save nine times their last salary upon retirement. ”)
If you are older than this age and haven’t started saving yet, well, it’s not too late. Yes, it will be a bigger commitment – you will need to start with a higher savings rate to make up for the time lost, say 10, 12, or 15 percent instead of six percent. But once you feel comfortable, increase your savings rate by one percent. If you haven’t started yet, set aside one percent of your paycheck this month. Increase it to two percent next month. Build it slowly and you will get wherever you want.