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Why You Should Save 1% More of Your Salary in 2016

By Jordan Wathen - Jan 2, 2016 at 1:41PM

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Here's how saving 1% more of your salary today will affect your income in retirement.

Saving a little bit more can have a huge impact on your ability to retire.

Perhaps the smartest thing you can do this year is increase your retirement contribution by 1% of your salary. Thus, if you contribute 5% of your salary to retirement, increase it to 6%. If you contribute 3% of your salary each year, then up your contribution to 4%.

An analysis by Fidelity suggests that the average American can significantly improve their retirement income by saving just 1% more of their salary each year. From 25 years old to 45 years old, the impact is massive.

How Saving 1% More of Your Salary Affects Your Retirement Income

Age

25

35

45

Annual income

$40,000

$60,000

$70,000

Monthly savings

$33

$50

$58

Additional annual retirement income

$3,870

$3,210

$1,880

Source: Fidelity Investments.

Fidelity's assumptions aren't particularly lofty. The most important are as follows:

  • Retirement age is set to 67 years old.
  • Each person receives a 1.5% annual raise.
  • The nominal rate of return on the additional investment is 7% per year.
  • Inflation is set to 2.5% per year.
  • Withdrawals are made equally until 93 years of age.

Note that the additional annual retirement income figure is inflation-adjusted. Thus, it is reported in today's terms so that it is directly comparable to current prices. However, the amounts are before taxes, though most retirees find themselves in significantly lower brackets upon retirement. 

Let's put the numbers in perspective. What does saving more now pay for in the future?

  • The 25-year-old's additional retirement income covers the monthly payments on a $16,000 car.
  • The 35-year-old's additional retirement income covers an additional two-week post-retirement cruise for years to come.
  • The 45-year-old's additional retirement income covers a very nice dinner for two twice every month.

Of course, making projections about the future is difficult to do. But one thing is clear: Saving 1% more of your income results in a negligible impact in your take home pay today, for a potentially massive impact to your future post-retirement lifestyle.

When you think about how much of your salary you plan to contribute to your retirement plan in 2016, consider increasing it by just 1%. One percentage point has a much greater impact than you might expect.

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