This is the first post in a series of easy steps I’m writing for the New Year that will dramatically improve your financial security in 15 minutes or less.
Retire way earlier by boosting your retirement contributions in 10 minutes
Log into your employer’s retirement plan (e.g.: 401k/403b) and increase your contribution to 20%. Or, just put in the full IRS-allowed max of $19,500 for 2021. Divide $19,500 into your base salary to get a percentage.
Contributing 20% will only reduce your take-home by 15%-ish, depending on your tax bracket, because of the taxes you’ll save. If you were already contributing 10% to your 401k, an extra 10% will only cost you 7-8%. You can live off 93% of your old spending without even noticing, I promise!
If 20% is more than you can stomach to do right now based on your current spending, just log on and boost your contributions by 2-3% instead, which you definitely not miss since that’s a mere 1.5 – 2.5% of your take-home. After upping your contribution, set a goal of getting to 20% eventually, and use the automatic increase function that most providers offer to boost your savings annually by 2% until you get to 20% (or the max contribution limit.)
No matter how much you decide to contribute, definitely put in enough to get all of any employer matching your company offers. That’s free money you can’t afford to pass up.
Why boost your retirement contributions?
In addition to saving thousands a year in taxes, boosting your 401k contribution from 10% to 15% per year means you will have 50% more money at retirement.
Yes, that’s right, for the price of only a ~3.5% decrease in stuff-you-could-buy-that-you-didn’t-need-anyway, your income in your golden years will go up by 50%! Even a mere 2% boost from 10 to 12% ups your retirement income by 20%, so at least do that much.
I’d take this deal any day; wouldn’t you…? If you’re still not convinced that saving for your future is something you must do now, picture yourself in your 60s or 70s: grey hair– or white, if yours is already grey–, (more) wrinkles, a slower step, and someone wiser, quieter, but a little more lonely and less lively than you are now. Don’t you want that person– you— to be financially comfortable, maybe even relatively wealthy, even if it means a small sacrifice on the younger you?
Do it right now, before you read any further!
Log into your workplace’s retirement account, which for most people is either a 401k or 403b plan. Search your company’s benefits site if you don’t know where to go, or if you know they use Vanguard or Fidelity, head straight there and login (create an online login if you’ve never logged in before.)
Click on your 401k or 403b account if you have multiple accounts, and then look for something that says ‘contributions’ like ‘change my contributions’. Click that, and find your current contribution, usually expressed as a percentage of your base salary. Enter the new number that you decided upon above, and save your work. You should get some kind of confirmation screen.
Great work! Keep reading. You need to do one more thing while you’re logged in.
Optimize your investments with a few more button clicks
Switch both your current investments as well as your future contributions to a low-fee Target Retirement fund like those offered by Vanguard or the Fidelity Freedom funds. Choose the year closest to your 75th birthday (e.g.: if you were born in 1980, choose the 2065 fund.) You should see some option like ‘change investments’ and might have to do this once for future contributions and once for the money already invested in your account.
For bonus points, double-check your ‘beneficiaries’, or set them up if you haven’t before. You want to make sure your assets are sent to the people or charities you want to get them if something untimely happened to you.
Don’t have an employer retirement account? Use an IRA instead
If your employer doesn’t have a retirement account, or you freelance and don’t want to set up a self-employed IRA, open a Roth IRA at Vanguard instead, then set up automatic monthly deposits with this link after you’re logged in. The maximum yearly contribution if you’re under 50 is $6,000/year, and $7,000 if you’re 50+. Max out if you can.
I’m assuming a Roth is best for you since I’m predicting you’re at or under the 22% tax bracket (i.e.: you make less than $100,000 single, or your family makes less than $200,000 if married.) If your marginal rate is 24% or more and would rather save on taxes now, use the Traditional IRA instead.
You’re now retiring earlier, or more luxuriously, or both!
Boom! You just secured your age 60+ retirement in the time it takes to make a cup of coffee. Pat your self on the back, take a lap and hit the showers.
Next up, make this simple change to you direct deposit and never worry about spending too much again.
If you want to retire earlier than that, read this too.
Share in the comments how much you bumped up your contribution, and whether you changed your investments or beneficiaries!