How much difference can 1% really make?
Many people underestimate how saving just an extra 1% of their income now can make a substantial difference down the road.
According to a recent financial study, when asked how much an extra $50 a month would generate over a 25-year period, the median response was $17,000—or less than half of the projected $44,000 value.
Let’s take a look at what the difference of saving an extra 1% can really make. According to the same study and assuming these people earn a 1.5% annual raise, net of inflation, work until they are 67 and invest their savings in assets that earn a 7% annual return:
• A 35-year-old with a $60,000 salary who saves an extra 1% annually must save $50 more a month now, but could receive an additional $270 of monthly retirement income in today’s dollars.
• A 45-year-old with a $70,000 salary who saves an extra 1% annually must save $58 more a month now, but could receive an additional $160 of monthly retirement income in today’s dollars
• A 55-year-old with an $80,000 salary who saves an extra 1% annually must save $67 more a month now, but could receive an additional $70 of monthly retirement income in today’s dollars.
I recommend saving a total of between 10% to 15% of your annual pre-tax pay for retirement, including matching contributions from your employer. If you haven’t been diligent in saving this much from the beginning, however, there has never been a better time than now. Start by saving up to your company’s match, and then increase your savings rate by 1% every year until you hit the 10% to 15% target.
You may not think you can afford to save an extra 1% per month. You also may assume that additional percentage probably won’t make that much of a difference in the end. But the numbers show even small steps can result in major benefits when it comes to retirement.
One easy way to put this savings strategy into practice is to always pay yourself first. In other words, designate that first 1% of your annual raise toward retirement.
In order to discipline yourself to save that extra amount, arrange for it to be automatically withdrawn from your paycheck and deposited in an investment account. Trust me—you probably won’t even miss it once it’s gone.
