Updated: Aug 9, 2018
We share a common thread in the world of financial matters. Most of us, on average are really bad at saving for retirement. We want to. We know we should. And we will...someday. What if there was a way to help us be better at this saving thing, actually save more every year and not have to think about it?
The reality is this. Some people don't have access to a 401k plan. Some don't know where to start. And yet even more don't think it's possible to save money each month because that money is needed now! These are real obstacles to saving in a 401k plan - It's one of those things that is always on our to-do list, but the box somehow goes unchecked. It's work and we don't like to do more work.
Luckily, your 401k has a little known feature that may be able to help you out with that. There's a simple way to put this whole thing on auto pilot and it's the easiest, most powerful way to save for retirement without even thinking about it on a regular basis.
Here's how it works:
You probably already know that most modern 401k plans offer a nifty feature called auto enrollment. When you work for a company that has this type of feature in the plan, you are automatically enrolled in the plan and you automatically save a set percentage of your paycheck (unless you opt out, which you should not do).
Let's run an experiment to see how much you'll save for retirement when you are auto enrolled to contribute 3% of your paycheck to your 401k plan and you make $75,000 per year.
Contributing 3% to your 401k plan if you make $75,000 means you are saving $2,250 per year for retirement.
Compound your returns at 7% and in 20 years, you'll have around a $100,000 saved for retirement. Nice work!
But wait! $100,000 is not nearly enough to last you in retirement. $100,000 will mean about $350 per month. For most people, this does not come even close to paying for...just about anything you would want or need when you don't have a steady paycheck.
Another feature in a 401k plan can help us all save even more for retirement. It's called auto-escalation. This feature adds a pre-set contribution amount every year to your plan. Let's say you decide on a 1% escalation every year. It would look something like this:
In year 1 you contribute 3%.
In year 2 you contribute 4%.
In year 3, you contribute 5% and so on. By year 15, you're finally saving enough for retirement, which is about 15% of your paycheck. But you accomplish this on a nice and easy upward slope over time.
By adding auto-escalation, you'll be saving more every year and that savings will compound with your returns and grow like a snowball for retirement.
How much do you have saved for retirement now that you added auto-escalation to your 401k plan?
If you saved 1% more each year from your paycheck and max out at 15%, you would have close to a million dollars saved at retirement.
That's $1,000,000 dollars in 20 years and 10 times the amount you saved without the escalation feature.
By adding an auto-escalation feature to your 401k plan, you, yes you could be a 401k millionaire.
These days, even a million dollars doesn't get you what it used to in retirement but it's a start. It's a great start. Do it now.