You can’t help but talk about the lottery with a jackpot sitting at about $1.5 billion dollars. One of my colleagues, Teig Stanley, was talking to me about a recent conversation he had with our colleague, Doug. Here is what he said:
Last week, I was speaking with one of my colleagues here, the over-achieving Doug Spencer CFP©, and he asked me: “What are your odds of winning a lottery?” I know the odds are always outrageous, so I’ve never played the lottery, but I decided to look up those odds and give Mr. Spencer a smart answer. I searched the Internet and found that, according to the lottery mathematics page in Wikipedia, the odds of winning a standard lottery (picking six numbers correct numbers out of 49) are 1 in 13.98 million. It doesn’t matter how many people play. Those are just the odds of picking those numbers. By comparison, you have better odds of becoming an astronaut, giving birth to identical quadruplets, or winning a gold medal in the Olympic Games.
The point Doug wanted to make to me is that the odds of collecting a massive amount of wealth by chance are slim, and the odds of doing so on purpose, however, are actually very certain. His method is simply to add 1% to your annual savings rate every year from now until you retire. It can even be done automatically in most cases through your employer’s auto-escalation feature in a 401(k) or other retirement savings plan. This got me to thinking about those numbers more seriously, and that’s when I discovered just how true his secret is – and how I can become a millionaire in just 15 minutes with incredibly little effort.
The standard American work week is 40 hours or eight hours per day. It just so happens that 1% of that eight hours is 4.8 minutes. I’m going to round that off to 5 minutes here. That means that in the first five minutes of every day, I’ve earned 1% of my income, and that’s what I’m going to add to my savings.
Doug developed an auto-escalation calculator that I used to then calculate what would happen if, starting at age 25, I contributed 1% of my income to my 401(k) and used moderately aggressive funds, and increased that contribution by 1% each year until I was contributing 20% (45 years old). According to last year’s Tower’s Watson survey of employers, the average pay raise per year is 3% for American workers, so by adding just 1% each year to my savings rate, I’m still getting the advantage of my pay increases and not missing that 1%. If my company matching contribution is 6%, and I start off making $48,000 a year, then by the time I retire at 65, I will have amassed over one-million dollars in my 401(k) account! It took me four minutes to open up and run this calculator with a few different scenarios. Your time may be quicker.
Actually signing up for an auto-escalator in most 401(k)s is a breeze. Just login and it’s an option under contributions. In some plans, it happens automatically when you sign up for the 401(k) or when you are auto-enrolled at the beginning of employment. When I walked through the process with a participant in a plan with whom I recently spoke, the whole process took less than three minutes!
While you’re accessing your 401(k), take just a couple of minutes to review your investments and re-balance to fit your investment plan, if necessary. For more insights on how to review and re-balance, start with this blog article from Financial Finesse’s Greg Ward.
Write yourself a quick thank you note from the future.