The 1% Effect and How It Impacts Retirement Balances
One effective way to increase retirement balances is by contributing an additional 1% each year, above current contributions. Doing so increases the balances faster accounts for inflationary costs, and leads to a more secure retirement, without significantly impacting cash flow. The idea is simple. Increase deposits to your 401K or IRA by 1% every year.
Why It Works
The one percent effect takes advantage of compounding balances. The longer you have until retirement, the larger the impact. This strategy will help those in their 20’s, and 30’s more than those in their 50’s because there is more time for money to grow, but ultimately helps everyone who employs it.
How It Works
Under the assumption that you begin with a zero balance, make $50,000 annually, and have 30 years to retirement, if you contribute 6% of income, at a 6% return, increasing that contribution by 1%, each year, the balance will grow to $279,563. Without the 1% annual increase, you save over $28,000 less. Workers benefiting from a 50% company match, under the same scenario, will see an ending balance of nearly $420,000, over $42,000 more than those who do not increase annual contributions.
Long Term Benefits
Saving for retirement is a monumental task. Whether you set a goal to have $500,000, 1 million or even 2 million dollars at retirement, you cannot save it all in one step. Slowing increasing total contributions, magnified by compounding over time, will help you reach your goal. A 1% increase on a salary of $50,000 calculates to $500, but only breaks down to less than $10 per week. Take that out in pre-tax dollars and you will not notice the difference in your take-home pay but will notice the difference in your growing balances.