Escalate Your New Year’s Resolutions to Save More

November 30, 2010

“This year I will . . . lose weight, eat healthier, save more and spend less.”  Sound familiar? We all are probably guilty of making empty promises to ourselves as we usher in the New Year.  I haven’t yet discovered the magic pill for eating healthier and losing weight, since being on the road conducting workshops every week makes it a bit too tempting to eat out instead of cooking healthy.  But I think I HAVE found the answer to resolving to save more and spend less without any effort.

Many companies are now offering the ability to sign up for an auto rate escalator for their 401(k) plans, which puts saving more on auto-pilot.  This allows employees to pick a yearly percentage increase and a final savings rate target so that an increase in their salary deferral happens automatically on a set date annually.  It may be tough to go from saving 5% to 15% in one move, but going from 5% to 6% is quite painless, especially if the increase can be timed to coincide with an annual raise.

Here’s an example:  A 35 year old that saves 5% of their $55,000 salary would have a little over $480,000 at age 67, assuming a 7 % rate of return.  If that same employee signed up for auto rate escalation, with a 1% increase that tops out at 15%, their ending balance at retirement would be just over $1,000,000!

So check with your plan provider, and ring in the New Year with a better resolve to save more.