Increasing the amount you save for retirement can feel really difficult. But researchers may have found a trick that significantly increases the chances you'll invest more -- and sometimes a lot more.
According to a recent study published in the Journal of Political Economy, workers who made a commitment in advance to put a portion of future raises toward their retirement were able to increase their average savings rates by 10 percentage points over 40 months. That's a huge impact that can make a big difference in the final amount they end up with as retirees. And it's something that you could do today with no effort on your part.
Committing your future self to save could be the ticket to increasing your retirement account contributions
The research involved a program called the Save More Tomorrow or SMarT program. Participants in the program made an advance commitment to putting part of any future salary increases into their retirement savings account. The researchers then observed their behavior over four annual raises and found:
- 78% of people who were offered access to the SMarT program joined it.
- 80% of people who enrolled stayed in the program through all four pay raises.
- The average retirement savings rates for people participating in the SMarT program went from 3.5% to 13.6% over just 40 months.
That means there was a whopping 10.1 percentage point increase in the amount being saved for retirement. And it happened over a relatively short period of time, with workers boosting their savings rates from dangerously low levels to relatively generous ones in just over three years.
Why banking your raises works so well
While not everyone will be able to participate in the SMarT program, every worker has the opportunity to make a commitment to themselves today that they'll save a percent of future salary bumps. This is true regardless of whether you're saving in a 401(k) at work or in an IRA or other tax-advantaged retirement savings account on your own.
Of course, if you can't formally enroll in the program, you'll need to be disciplined enough to follow through with filling out the paperwork to up your contributions when you get notice of a raise. But if you put your commitment in writing to yourself or enlist the help of an accountability buddy, doing that should be easy -- especially if you act before you ever get a single larger paycheck.
Taking this step and making sure some or all of your raises are redirected to your retirement savings before you get a chance to spend the money is an especially effective way to significantly increase your savings for obvious reasons. You'll be able to add to your retirement accounts without cutting out any of your current spending. And you can make the change before you ever have the chance to inflate your lifestyle to account for your salary bump.
It's up to you to determine how much of your future raises you want to commit. You could promise to save half, which would mean you increase your retirement account contributions by 1% if you get a 2% salary increase. Or you could commit to saving the entire thing -- at least for your next few raises until you get up to a generous level of retirement savings. Whatever you decide, just make sure you stick to the promise you've made yourself and set up your added contributions ASAP.
If you do that, it won't take very long for you to see a signifiant difference in your retirement savings, and before you know it you'll be investing more for retirement than you imagined possible.