“It’s amazing how the power of math can boost wealth.”
The way to make investment math work for you in most instances is to save more and spend less. Duh!
But a recent Forbes article, “The Most Potent 401(k) Booster,” says that if you have the self-discipline and the ability to plan, you can shrink your debts and add to your emergency, college, or retirement funds.
Saving is essential. A recent Wells Fargo survey says that 71% of those over 40 who are consistent savers believe they will have enough for retirement. The more you save, the more confident you will become in your ability to live the life you want.
Start saving when you hit the workforce. But if you’re in your 50s, you can start to save more aggressively. Contribute the maximum amount allowed to the 401(k) plan—$18,000 in pre-tax dollars in 2015 and make catch-up contributions to help make up some ground. You can also save an additional $6,000 if you’re over 50 as a “catch-up” contribution and deduct these amounts from your federal income tax (unless they are made to a Roth IRA or Roth 401(k), which tax contributions but not withdrawals).
If you aren’t saving on your own or through a 401(k), set up an automatic savings plan that contributes money to your 401(k) or IRA. Most employers have this. Then look at your savings rate—this number makes a big difference in how much you can save.
By increasing your contribution, you can boost your nest egg dramatically. For example, let’s say you’re 30 and you make $50,000 a year. If you receive an annual raise of 2%, and your employer matches half of your 3% contribution, after 35 years, you’d have just over $400,000 at 6% annual rate of return. That’s with a starting balance of only $10,000.
But what if you double your contribution rate to 6% and all other factors remain the same? You’ll have more than $730,000 with a modest rate of return and low starting balance. This works only if you save more and take your employer’s match. Why not? It’s free money. If you set it up on an automatic plan, you’ll save even more because when you get a raise, your contribution amount will also increase. The math works all the time.
Reference: Forbes (December 7, 2015) “The Most Potent 401(k) Booster”