As part of this week’s The DIY Millionaire’s spring challenge, I challenged you to consider increasing your contribution rate to your 401(k) by at least 1-2%. You might have thought, “That’s not a huge increase, why even bother?” Well, it might not seem that significant now, but I’m here to show you that a small increase today pays big in the far future. And it pays even more when you are still in your 20s and you have time on your side in which you can invest in the stock market to grow your wealth and build retirement income. Let’s look at an example.
EXAMPLE: As you saw earlier in my post on how $47K can grow to $3.2M, you were able to amass a multi-million dollar net worth by contributing 8% of your income over a period of 45 years (you started working at 22 and retired at 67). Now how much would you have amassed had you contributed 9% Or even 10%? At 9%, you’d end up with roughly $3.4M by age 67, and if you had contributed 10%, you’d round out at approximately $3.6M! A 1% increase earns you $200,000 more, while a 2% increase earns you $400,000 more!
How does this happen?
- Your increased employee contributions add more principal to your 401(k) account. With each increase, you give a bit more of your salary to your 401(k). But I am talking about a 1% or 2% increase which doesn’t eat too much at your wallet. In the example above, you contribute 8% of $47,000, which is $3,760 a year. If you raise that to 9%, then you are contributing $4,230 a year. The difference between the two is $470 a year, which amounts to roughly an increased contribution of $40 each month! So, for only $40 each month, you can expect a $200,000 increase in your future 401(k) value. Not bad!
- Your employer match gives you an extra kick. As an employee you contribute $3,760 at 8% of your salary, and $4,230 at 9%. But in the example above, your employer shells out a generous employer match of 100% on the first 3% you contribute and 50% on the next 3% for a total 4.5% matching contribution, plus a 3% non-elective contribution. In that regard, your annual contribution is bumped up an extra $3,525. Keep contributing more than the company match for free money!
- Compounding increases and accelerates 401(k) growth. As you contribute more, and let’s assume you are invested in the stock market and averaging an 8% return over the long term, your increased contributions are making more earnings, which then the earnings are making even more money on themselves. It is through the power of compounding that a little difference today can add a whole lot to your retirement portfolio tomorrow.
So, what are you waiting for? Take the challenge, and contribute just 1% more to your 401(k) this spring. Your future self and 401(k) portfolio will thank you for the extra change!
Want to learn more? Pick up a copy of my book …
From Millennial to Millionaire: DIY 401(k) – 5 Do-It-Yourself Steps for the Digital Generation to Design and Manage their 401(k) on Amazon.