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
Option #1 – Up your contribution by 2% now or in the future
Log into your 401k or other workplace retirement plan right now and boost your contribution amount by 2%. (Look for something that says ‘Change contributions’ or ‘contribution amount’.)
Opt in for future 2% increases
After upping your contribution– or even if you feel like you can’t boost your savings rate today– set up annual future increases of 2% if your plan offers an automatic increase function (many plans, including Fidelity & Vanguard, do.) Set up future annual increases of 2% per year until you get to 20% (or the max IRS contribution limit.) You’ll usually find this option in the same place where you edit your current contributions.
Consider setting the annual increase date to be just after your company’s annual raise period so that you don’t see a decrease in your take-home pay when the extra 401k contributions kick in since your pay will likely be higher then.
Option #2 – Save 20%, or max it out
Log into your employer’s retirement plan (e.g.: 401k/403b) and increase your contribution to 20%.
If you make more than ~$110,000 a year, or if you’re just an excellent saver and make less but still want to max out, divide the IRS limit– $22,500 in 2023 for those under 50, $30,000 if you’re 50+– by your salary, round up, and use that percentage. For example, if you make $140,000, $22,500 / $140,000 = 16.1%, and rounding up = 17% for the year to max out.
Get all employer matching no matter what
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?
If you’re at all hesitant here, the first thing to remember is that this change is completely reversible. You can go in anytime– even minutes after you make the change– to your 401k and change your contribution rate back down. Lean in here and just do it for your future self. It’s not a one way door!
Tax savings and more wealth
In addition to saving thousands a year in taxes, boosting your 401k contribution from 10% to 15% per year over your working career means you will have 50% more money at retirement in your account.
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…?
Imagine future 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?
Any reason NOT to do this?
There’s really only one reason to not do this, and that’s if you have high-interest debt like a credit card balance or a personal loan charging greater than 8% or so. Pay that off FIRST before increasing your 401k contributions beyond the minimum required to get all your employer matching. Read this to learn how to free up cash to pay down debt.
Should you choose Roth or regular (pre-tax) 401k contributions?
Many employers offer Roth 401k contributions, although generally employer matching will always go into the pre-tax account. If you expect to be in a lower tax bracket in retirement vs now, choose pre-tax. Otherwise, choose Roth. Generally, younger folks just starting out in their careers should do Roth, and older folks (30s-50s) in their peak earning years should do pre-tax 401k contributions.
Roth if you make less money, regular if you make more
Another rule of thumb of mine is if your tax bracket is less than 22% (i.e.: 12% in 2023), i.e.: you make about $55 K or less Single or $110,000 K or less as a Married couple– do 100% Roth contributions. If you make more than that, 100% pre-tax is probably your best bet, but you can always reach out to a financial advisor to discuss more.
There’s no bad way to save though, so just make your best guess and move on. The key thing is to save the money, not agonize other Roth vs pre-tax and what future tax rates will be.
Increase your contributions 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 in 2023 if you’re under 50 is $6,500/year, and $7,500 if you’re 50+. Max out if you can. (If you work for yourself, consider opening a small business retirement plan.)
I’m assuming a Roth is best for you since I’m predicting you’re at or under the 22% tax bracket. If your marginal rate is 24% or more and would rather save on taxes now, use the Traditional IRA instead, but ONLY if you or your spouse don’t have a 401k at work, since that generally prevents you from making pre-tax contributions to a Traditional IRA.
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 your direct deposit and never worry about spending too much again.
If you want to retire ever earlier, read this too.
Share in the comments how much you bumped up your contribution, and whether you changed your investments or beneficiaries!