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.
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