What to do with your end-of-year pay rise? Increase your pension contribution. here’s why

When you get a raise, what’s the first thing you do (besides a happy little dance)? Celebrate your newfound wealth by eating out? Splurge at happy hour? Buy the new car you are interested in?

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Not so fast. Why not zip online and increase your retirement savings contribution? Even a 1% increase can make a huge difference.

Nearly half of families have no savings in a retirement account, according to the Economic Policy Institute. Median values ​​of retirement savings are low for all age groups, ranging from $1,000 for families in their mid-30s to $21,000 for families approaching retirement. Median account balances in 2016 were lower than at the start of the new millennium.

Besides this scary reason to contribute more, let’s look at other reasons why you want to save your raise.

Reason 1: Experts suggest saving at least 15% of your income to prepare for retirement.

Fidelity suggests saving at least 15% of your income for retirement each year, which includes matching contributions or profit sharing that your employer pays into your workplace retirement account, such as a 401(k) or 403( b). Saving at least 15% of your income can help ensure that your current lifestyle remains the same as in retirement.

If you’re not currently saving 15%, you’ll want to seriously consider doing so or risk having to cut your retirement.

Reason 2: You can increase it gradually so it doesn’t feel like a major impact.

You don’t have to go broke. Consider increasing your retirement savings percentage to just a 1% increase. It doesn’t look like anything at all, does it? In fact, it’s a win-win situation — you increase your savings and you don’t feel the bite at all. Here’s what you can consider doing to go 15% each year, assuming you’re already saving at least 5%:

  • Year 1: increase to 6% at the end of the year, then to 7% six months later.
  • Year 2: Rise to 8% at the end of the year, then to 9% six months later.
  • Year 3: Increase to 10% at the end of the year, then to 11% six months later.
  • Year 4: Rise to 12% at the end of the year, then to 13% six months later.
  • Year 5: Rise to 14% at the end of the year, then to 15% six months later.

It seems like a no-brainer, but sometimes laying out your plans like this can help you see the progression of how you’ll get there. If you want to continue, go for it until you maximize your savings.

Reason 3: 401(k) contributions increase every year.

The IRS increases contribution limits each year. Sounds like excuse enough to increase your pension contribution, doesn’t it? For example, contributions increased from $19,000 to $19,500 for employees under age 50 in 2021. The IRS will likely increase contribution amounts in 2022, although exact amounts have yet to be announced. . Between the Internal Revenue Code’s cost-of-living adjustment and Consumer Price Index indicators, 401(k) contribution limits will likely increase from $19,500 to $20,500 in 2022 , according to Mercer’s projections.

Reason 4: You can strengthen your tendencies to set goals.

When you start thinking about how you’ll use your year-end pay raise to save for retirement, you start thinking about your overall goals.

It gets you thinking about how much you’ll need for a comfortable retirement and how much you’ll need to save per month to get there. Unfortunately, there is no perfect number for every person. You should consider your current spending and saving levels and your retirement lifestyle preferences when considering the right amount to target.

Reason 5: You can think about other savings goals.

You may be willing to invest in your employer’s 401(k) or 403(b) (and you should do so to get the match). However, you can also consider investing in a Roth IRA or traditional IRA if you wish. This lets you think beyond your employer’s retirement fund, especially if your employer doesn’t offer the investment options you like.

If you like the Roth 401(k) option instead of the traditional tax-deferred plan, you might also consider investing in one. Find out if your company also offers a Roth 401(k).

What other savings goals do you have? Saving for your children’s college education? Saving for a well-deserved vacation? Use this raise as an opportunity to figure out what you really want, both long-term and short-term.

Reason 6: You can use this as a springboard to think about how you might pay off your debts.

If you have other debts, your pay rise at the end of the year may also cause you to think about how you can pay them off. According to Equifax, common debts include credit card debt, mortgages, car loans, student loans and medical debt. This debt comes with tax implications and a potential negative impact on your credit score.

You can also think about the common question: Pay off debt before saving for retirement or vice versa? Some experts suggest pausing your other financial goals and focusing on paying off your debt first, especially if you have high-interest credit card debt. Others take the approach that you’ll be paying bills all your life, so might as well save for retirement first.

If your company offers a 401(k) match, most experts agree that you need to invest up to the limit to get your free money and then tackle debt repayment.

Invest your salary increase in your retirement

When you get that raise, stop for a second. Consider a renewed commitment to your future. Start with the end in the lead and work backwards. What do you want your retirement photo to look like? Don’t put a dent in your future. If you get really adventurous, you can also try maximizing your retirement contributions to your 401(k).

You can do whatever you put your mind (and money) to. It all starts with careful planning and thinking and a determination to pay yourself first.

William M. Mayer