The 1 Percent Solution

Some might call it “nil” – but it can make the difference between happiness and misery in your future.

It’s the 1 Percent Solution, and it simply means boosting your retirement savings by a single percentage point a year. You’ll hardly miss the money (and you’ll get a tax break, too). If you do this religiously beginning at an early age, it can make a huge impact on your future. (Even if you aren’t now at an “early age,” it’s not too late, and you might want to make yours the 2 Percent or 3 Percent Solution.)

My colleague Jim Blankenship , who practices in New Berlin, Ill., is running a campaign to get people to start saving more. He’s worried, as am I, that they just aren’t putting enough away for their future. He says that now is the perfect time for workers to increase contributions to their retirement plans, because for many, it’s benefit “open enrollment” time. Instead of sitting by idling wringing his hands, Jim has recruited his fellow fee-only advisers to join the cause.

I ran some numbers and found the following: Say Mr. Grasshopper starts working at a $40,000 salary, receives raises of 3% a year and contributes a flat 3% to his 401(k), which grows at a compounded 5% per year. He would have $77,564.22 after 25 years. His friend Mr. Ant, who boosts his contribution by 1 percentage point a year, would have $379,927.47 after 25 years. Which worker would you rather be?

It’s easy, it’s fast – do it now for a happy and comfortable future!

– John Davis