Does your retirement dream include a spectacular vacation once a year? Eating out every night? Not worrying about money?
One way to help make your retirement “happy place” happen is to save now—even a little more. Putting just 1% more of your salary into a tax-advantaged retirement account like a 401(k) or 403(b) could make a noticeable difference in your ability to afford the retirement you want.
“The retirement savings mountain might appear imposing from a distance, but the reality is that the climb isn’t as steep as it looks,” says Jeanne Thompson, vice president of retirement insights at Fidelity. “Small steps can turn into big strides.”
How big? Let’s look at several hypothetical 401(k) investors and see what happens if they contribute just 1% more of their salary to their 401(k) until retirement at age 67.1 A few notes: For simplicity, we use a 401(k) throughout, but the examples also apply to a 403(b) and 457. Our examples assume that the investors’ salaries grow 1.5% a year—adjusted for inflation—which will boost their contribution amounts along the way. We also assume a 7% long-term compounded annual hypothetical rate of return, which aligns with an average long-term return for a growth-focused account.
Take a look at the chart below to see what a difference a small increase can make. Pretty amazing, right?
Yes, contributing just 1% more now—no matter your age—can add up. And if you start when you are younger, even a smaller amount can mean more money to spend in retirement. For instance, in our example, even though 25-year-old Bob is saving less than, say, 35-year-old Suzie, he can end up with more retirement income.
And it is never too late. As you can see, if 45-year-old Andrew contributes $58 more a month, that can mean $1,880 more a year in retirement.
If you don’t have a 401(k)
You may be self-employed, not employed, or your employer doesn’t offer a 401(k). But you can and should save in a tax-advantaged account like an IRA. There are several types of IRAs—see the table below.
|No 401(k)? Consider other tax-advantaged retirement savings accounts.|
|Eligibility||2014 and 2015 contribution limits|
If you are already contributing to an IRA, chances are you can contribute more. The average IRA contribution to a Fidelity IRA in 2014 was a little more than $4,000—despite the $5,500 limit for those under age 50, and the $6,500 limit for those age 50 or older. Saving $50 more a month, or $600 a year, can make a real difference.
Let’s look at several hypothetical IRA investors and see what happens if they consistently contribute just $50 more a month to their IRAs until retirement at age 67.2 For our examples, we assume a hypothetical 7% a year compounded. A 25-year old who consistently saves an extra $50 each month in an IRA until age 67, could receive an estimated $4,620 in additional pretax yearly retirement income. A 35-year old could have $2,660, and a 45-year old $1,400.
“The key is to save early, and in tax-advantaged accounts,” says John Sweeney, executive vice president of retirement and investing strategies at Fidelity. “That means trying to contribute as much as you can to your 401(k) and IRA contributions when retirement is years away.”
See how you’re doing
Everyone’s situation is unique, of course. So take the time to see how you are doing with Fidelity Retirement Quick Check (login required). It lets you estimate how additional savings can help improve your income in retirement.
At Fidelity, we recommend saving at least 10% to 15% of your income toward retirement (this includes any amount your employer contributes through matching or profit sharing contributions). If you’re behind, don’t fret. Few people get there overnight. Think of planning for retirement as a journey. The key is to save as much as you can now and try to increase your savings over time.
“The surest way to achieve a financially secure retirement is to start early, save regularly, and increase the amount you save as your income increases,” says Fidelity’s Thompson. “It may enable you to do some of the things you have always dreamed of in retirement.”
- Determine whether you’re on track to save enough. See the long-term impact of saving more with Fidelity Retirement Quick Check calculator (login required).
- Already a Fidelity customer? Contribute to your IRA.
- Not yet saving in a Fidelity IRA? Start saving now.
- Is your 401(k) or 403(b) managed by Fidelity? Start saving 1% more now. Log into Fidelity NetBenefits.
Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
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