This week on my segment with Fox 59 I Skyped myself in because of the weather, but I didn’t let that affect my segment. I’ve got some great advice about an easy way to save for retirement. Watch my Skyped-in interview with Ray Cortopassi below.
If you get an annual raise or you are expecting one this year, congratulations! But don’t get too excited. While the gross total of your raise may sound like a lot of money, after a portion is contributed to your 401(k) and taxes come out, you’re really only taking home 70% of your raise. So instead of absorbing that amount into your budget, I want you to save the rest of your raise. I don’t want it to go into just any savings though, I want this amount to go directly into your 401(k). There are two reasons for this. The first is that contributions made to your 401(k) will be tax deductible and the second is because this will help break your dependence on your income.
To be clear, I’m not asking that you save every raise for the rest of your working life, but instead you’ll save only the amount of this year’s raise for the rest of your working life. Let’s do an example. For this example you are 35 years old and your take home raise is $125 a month. If you put that $125 a month into your 401(k) until you retire, you will have accumulated over $60,000 (assuming an 8% rate of return). $125 is a fairly insignificant amount which would have been easily absorbed into your budget and forgotten within a few months, but making the effort to save that amount reaps major rewards and puts time back on your side.
I also want to go more in-depth with the ‘breaking income dependence’ piece. While saving money for retirement is reason enough, the added benefit to saving your raise is that you will slowly break your income dependence. If every year you get a raise and absorb that small amount into your budget, then your expenses will slowly crawl up over the years. This can be a problem when you get closer to retirement age and you are used to living off of the majority of your income. In order to break that cycle it’s important to live off of less and less of what you make. Saving your raise is a great way to start that process.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.