What is a 1% increase in retirement contributions worth in the future?

You have many options for deciding how much money you want to save for retirement, but ultimately you wind up with a specific dollar amount or percentage of income that you save.  What you’re investing in usually determines if people will talk in terms of a percentage or a dollar amount.  Folks will typically talk about a percentage when referring to 401(k) contributions because companies often match employee contributions on a percentage basis.

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An average company will match 50 cents for every dollar you contribute towards your 401(k), up to around 3% of your salary.  If you make $10,000 a year and contribute 6%, you’ll have invested $600, and your company would have invested $300.  If you make $100,000 and contribute 6%, you’ll invest $6,000, and your company will match with $3,000.

Other investments, like a Roth IRA, are based on dollar amounts.  In 2015, the most a worker under 50 can contribute to an IRA is $5,500 a year.  If you make $10,000 a year, a $5,500 contribution is 55% of your salary, and if you make $100,000 a year, that’s 5.5% of your salary.

It’s hard to talk about specific dollar amounts since salaries vary for everyone.  However, it is easy to talk about percentages.  If you make $50,000 and contribute 6% of your salary to your 401(k) for 30 years, assuming the usual 7% return, you’d end up with $283,382.  If you raise that contribution to 7%, you’d end up with $330,613.  If you made $100,000 a year and contributed 6%, you’d end up with $566,765, and if you contributed 7%, you’d end up with $661,226.  As you might imagine, the ending balance from the person who made $100,000 is double that of the person who made $50,000.

Knowing this, we’ll talk in terms of percentages instead of dollars.  In the example above, when investing for 30 years, increasing the annual amount invested from 6% to 7% would give you an 18.76% increase in your retirement account.  If you created a list of your income and expenses, you should know what percentage of your income you’re currently investing each year.

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I created the following calculator to help show the impact of increasing your retirement contribution, even by a small percentage.  Just fill out the fields below; current age, retirement age, current income, current retirement balance (if any), expected salary increases (if any), the current percentage of your salary invested, the future percentage you will invest, and your estimated return (I use 7% in my calculations).  You’ll then see how much money you will have if you do nothing, how much you’ll have if you increase your contribution, and how much bigger your retirement account will be when you retire.

If you play around with the calculator, you can gain some insights into the impact of increasing your retirement savings, even if it’s by a fraction of a percentage.  A 24-year-old making $48,000 with 1% raises, contributing 6% of her salary, would have 4.17% more at age 67 by increasing her contribution rate 0.25%.  During the first year that’s a monthly addition of only $120.

WordPress calculator created using Calculated Fields Form.

Hopefully this calculator motivates you to increase your retirement contributions, even if it’s only by a small amount.  The less you’re contributing now, the more of an impact raising your contribution rate will make.  Someone investing 3% of his salary will see a 75% increase in their final retirement balance after 30 years of investing by contributing another 4%, while someone contributing 16% will only see a 25% increase in his final balance by contributing an additional 4%.  Of course, those percentages aren’t everything, in the end we need money in retirement.  The first investor, if making $50,000, went from having an estimated $188,922 while investing 3% to $330,613 by increasing it 4%.  The person contributing 16% of $50,000 went from $755,686 to $944,608 by investing 25% for 30 years.

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Another resource I created is a spreadsheet to visualize what the calculator above is doing.  You can get a big picture view of what increasing you contribution percentage will do.  It’s available here:  What if – Increasing Contribution Rate.  To use the spreadsheet, just put your current salary, estimated return on investment (I use 7%), and how many years until you retire.  You can then click on the two tabs at the bottom to see what your account balance will be if you do nothing, and what it will be if you raise your contribution rate.  The first tab shows the data as a dollar amount, and the second shows it as a percentage.

If you have any questions or comments, you can reach out below or continue the discussion in the forum.  If you are interested in receiving a notification of new posts, you can subscribe here.

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