Automatic 401k Contributions for Retirement

April 23, 2010

Increasing your 401k contributions every year is a great way to grow your retirement plan.  You probably don’t need a retirement calculator to tell you that your 401k plan will reach your retirement savings goals much faster if you put in more money each year. BUT, knowing that you need to increase your annual investments doesn’t make it any easier to put in more money. 

Investing More in Your 401k

Depending on whether you have a traditional 401k or a Roth 401k, the immediate tax implications may differ, but the long term growth effect of increasing your 401k contributions can be pretty big over time. Although the government has established 401k contribution limits, many of us never come close to investing that much into our retirement account every year.  So how can we talk ourselves into saving more for retirement?

Automatic Savings Plans

Our 401k plan has an optional feature called Automatic Savings Increases that lets us increase the amount we invest into our 401 k automatically each year.  As you can see below, I get to choose what percentage it increases each year, what the maximum contribution percentage is, and what day in the year the increase goes into effect. Our 401k investments are made out of my paycheck so the actual first day of the increase will depend on when I get paid, which is the first and middle of each month.

Of course you can opt into or out of these increases, when I signed up for my 401k account I decided choosing to participate would be a good idea.

Many companies, mine included, give annual performance reviews and based on your results give you a certain percentage of salary increase.  My thoughts were that I’d increase my 401k contributions as my salary went up.  The only problem is that life gets busy and I forgot to change my contribution percentage last summer when my salary went up.

The good news is that I had signed up for the Automatic Savings Increase plan when I started the job so my contribution percentage automatically went up last year.  Even though you may forget to contribute more, you’ll likely remember once the automatic increase kicks in and the amount of your paycheck changes; that’s what happened to me.  However, if you time your contribution increases to correspond with annual pay increases then the overall impact to your cash flow should be minimized.

Ben

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Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


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Comments

14 Responses to Automatic 401k Contributions for Retirement

  • Alan

    I have read your article, I have a question for you. We talk about 2 types of Investments 1. ULIP and 2. Mutual Funds.

    When you talk about ULIP, The maintainance Charges ,Morality Charges , Allocation charges come close to 40% of annual PermiumEg.HDFC Pension Plans. Apart from that they charge every year for maintainace.

    When you talk about Mutual Funds One time entrance fee of 2.5%, no annual charges.

  • Anonymous

    Retirement income planning is business of tricks. You need to be able to see into the future, account for emergencies, Well…. the future state of the economy and know what your investments will be earning to generate income.

  • Brian

    yeah!!! A 401(k) retirement savings plan allows a worker to save for retirement and have the savings invested while deferring current income taxes on the saved money and earnings until withdrawal. This type of plan is also known as a “traditional” 401(k).

  • Brian

    Yes it is ..that’s why, Landmark legislation that Congress passed last year encourages employers to enroll workers in a 401(k) automatically, increase employee contributions automatically each year and automatically invest the money in the stock market, which offers the greatest potential for long-term growth.

  • Jackie

    That’s nice that your company offers a service like that. I was always amazed at how little an increase to my 401k actually decreased my check. I guess that’s the joy of pre-tax money!

  • Money Reasons

    This is a great painless way to do it!

    When I joined my company’s 401k plan, I started out of the gate at a 10% contribution rate (more bang for my buck)! So while I like this automated plan. If you start at a decent contribution rate, you will naturally be use to the income stream that you receive.

  • ElleWall

    Always a joy to read your articles, and always learn something new! thumbs up!

  • Daddy Paul

    What I found valuable is to put a fixed amount into the 401K and when I earn extra income (OT, bonus ect.) put a portion of that money into the Roth.

  • Paul

    I like that tool but I think that once you reach a certain point in your 401(k), you should begin to take advantage of your ability to tap a Roth IRA. This is mostly a tax move designed to offset the belief that deferring taxes in the future may not be the best bet. In some scenarios, your current income tax rate might be lower or as low in the future. Which is not what we are hoping will happen.You also have better control over which funds you chose (wider variety) and how much you are actually paying for those investments.

    Then, when you max out that plan, go back to your 401(k) and resume your increases.

    There is another type of IRA I have been discussing lately in the self-directed IRA, which for some more savvy investors may be low hanging fruit. This type of IRA allows you to buy real estate, franchises, invest in precious metals… the list goes on.

  • James

    you are right it is great to max our your 401k contribution and its easy to put it on paper the tough part is the reality of actually leaning to live in the now with less cash.

    Can it be done, yes. is it easy, no.

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