In a recent article, retirement expert Jean Chatzky outlined a simple but effective method for increasing retirement savings using a 401(k). She pointed out a method many people miss out on. It revolves around the principle of “auto-escalation” which is commonly available with many 401(k) plans, where contribution percentages increase automatically each year by 1% or 2%. This strategy guarantees an increase in savings without the need for decisions on the saver’s part each year.An obvious perk of this approach is that it helps grow your retirement funds incrementally, often without a significant reduction to your take home pay. With most organizations offering annual pay increases, incrementing contribution rates to retirement accounts by a small percentage every year means that more retirement funds are being set aside, while savings are not being significantly strained. Chatzky emphasizes how so many workers miss out on the opportunity to save more by compounding growth year after year, as many stick to a single percentage contribution for years on end. With the ability of auto-escalation setups, employees are able to “set it and forget it” where in this case their retirement savings are able to grow much more due to compounding over time. She emphasizes how this is extremely important for those that struggle remembering to manually make the increased contribution and are scared by the thought of the entire process. For those who are not sure if their 401(k) plan provides this feature, the guidance is to directly reach out to their HR or plan administrator to check if auto-escalation is possible. This simple hack utilizes a plan feature to save for retirement, a vital step in achieving future financial freedom.
Around the web
