Need to Start Saving for Retirement - The 1% Retirement Trick
According to a recent Bankrate.com study, 21% of working Americans aren't saving anything for their own retirement. Point blank, that's crazy!
There are many reasons why working adults do not save fore retirement, but it is often tied to some valid reasons (or excuses) including:
I’ve got time, I’ll do it later
I don’t make enough now, I am barely surviving paycheck to paycheck
I am going to work until I die anyways so why save for retirement?
YOLO (am I too late in the game to say this?)
I contribute to social security - that’s my retirement
I don’t know where to start
Whatever the reason might be, many people just don’t know how to start or don’t know if they really can afford it, especially when personal financial gurus saying you should stash at least 15% of your income into a retirement plan.
So as daunting as that might seem, how do you get started if you are in the boat of “I can’t afford it” or “I don’t know how to start.”
The 1% Trick
One of the best ways to getting started with anything is starting small. For retirement plans that is the 1% trick. The idea of the 1% trick is to start so small that you almost don’t feel it. If you are making $500 per paycheck, 1% of $500 is $5. So you put $5 towards a retirement account and then you have $495 left. You probably will tell me you miss it, but you are really not missing it. Then every 3 months, raise it by 1%. Keep doing that until you get to 15%, which literally might take almost 4 years (15%/4 changes per year = 3.75 years). That’s quite okay if you are not saving at all.
Just to show you what that looks like, I’ve provided a model of what this would look like assuming the following assumptions:
Salary - $3,500 Per Month
Starting Investing Rate - 1% Per Month - Increased by 1% per Quarter - Stopping at 15%
Contributions Continue for 30 years (Once we’ve hit 15%, we keep saving 15% until year 30.
Rate of Return - 7%
Notice that after 30-years, you’d have $558,332.98 in your retirement account if you averaged 7% annually (I am not saying you can average 7%, but many personal finance gurus would say 7% is doable with the right investment strategy).
This doesn’t even take into account that you would get a raise every year or couple of years. I assumed that you’d make $3,500 a month for 30 years, which you won’t be (I think). Now I know some readers will question inflation and that is a valid concern here, but the focus of this post is about getting a start with your retirement savings ($230,025.80 in today’s dollars). Some savings is better than NO savings.
Now as a for warning for anybody who is looking at this and saying man, $558,332.98 is a lot of money. Well, it is, but that’s not nearly enough in retirement. In today’s dollars using a 4% withdrawal rate, that pretty much equates to about $766.75 a month in retirement. If you include the average social security benefit of $1,461, you're looking at a monthly income of about $2,227.75 in today's dollars. That's an okay dollar amount especially if you own your home by retirement, but may not be nearly enough in the long-run. (Taxes not included) But don't let that discourage you from savings because this is just the first step to achiving financial freedom in retirement, which you want at the end of the day.
So what are you waiting for? Head over to your employer’s HR department and see if they can get you started with 1% of your income going to your retirement account. If your employer doesn’t have a retirement account available to you, then head over to a brokerage firm and set-up an account as well as an automatic withdraw from your checking account in the amount of 1% of your gross paycheck (or you might be able to tell your employer to send 1% over to your brokerage firm using your brokerage firm’s routing number and account number).
Here is my confirmation that I’m putting away 1% into my Roth 403(b) account with my employer. (Sorry I removed the dollar amount because then you can reverse the number to find out how much I make, but trust me it’s 1% of my salary).
I hope those of you who are having trouble contributing to an investment retirement plan will now be encouraged to start investing in your own future, even if it is 1% at a time.