You’ve heard the advice that you should try to contribute as much as possible to your retirement plan, but experts tend to speak in percentages. More important to you is what will be the real-life impact of saving for retirement. In other words, what does saving 6% of your earnings mean for your paycheck? How much will come out? Will you feel it if you increase your contributions another percentage point or two? And finally, what will your small paycheck sacrifices now mean for your future?
Take a look as we do the math for you so you can decide how much of your pay you can afford to set aside for your retirement.
Contributions toward your retirement account come out before your direct deposit hits your bank account, meaning that it’s automated so you don’t actually have to think about it. For illustrative purposes, let’s assume you’re someone who earns $50,000 and gets paid twice per month, meaning each paycheck will be $2083.33. Here’s what your individual paycheck contributions will look like using different contribution percentages:
When you break it down, the paycheck difference between setting aside 6% versus 10% is about $168 a month. While that might not seem like a game changer now, over 20 or 30 years, that extra amount can make a big impact.
Retirement planners might have different philosophies, but they all agree on two things: early and ongoing contributions are crucial, and bumping up your contributions even slightly can make exponential differences later on.
To illustrate how it works, let’s assume a rate of return of 8%. Then, using the same annual contributions from the example above, let’s see how each scenario plays out over time.
Calculation assumes a $50,000 salary and 8% rate of return on investments. Payroll deductions, taxes, and rate of inflation are not included in this calculation.
Now of course, this is a very simplistic example. There are lots of other factors at play that may help you grow your retirement account even further. For instance, your employer might provide matching contributions, you are likely to get pay raises along the way and you may even be able to contribute more than 10% in some years.
The bottom line is that bumping up your contributions even slightly can lead to a much healthier portfolio down the line. If missing a few bucks in your paycheck won’t be detrimental to your budget, give it a try. You may even be surprised that you don’t feel the difference at all, and your future self will thank you.
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This information is general in nature, may be subject to change and does not constitute legal, tax or accounting advice from any company, its employees, financial professionals or other representatives. Applicable laws and regulations are complex and subject to change. For advice concerning your situation, consult your attorney, tax advisor or accountant.