Supersize Your Retirement Planning

René Nourse, CFP® |

It doesn’t take an advanced degree in finance to know that the more money you put into your retirement account, the more you’ll have to spend later. But when it comes to contributing to that retirement fund, how much should you be putting away annually? And how much should you plan to have saved at different ages to make sure that you can live comfortably in retirement? For an individual at age 40, a good rule of thumb is having 3 times your current annual salary already banked. If you are 50, you should have at least 4 times, and ideally 5 times, your annual salary saved. So, if you’re making $90,000 a year, you should have a minimum of $360,000 already saved.

What happens if you’re not there yet? There are a few ways to get there. And according to one study, just a few percentage points can make a dramatic difference over time.

Upsize Your Retirement Contributions

Several variables contribute to the effectiveness of 401(k) or 403(b) plans—including fund selection, asset allocation, and portfolio rebalancing. However, studies have found that the one variable with the biggest impact is the deferral rate. That means changes in the proportion and amount of an individual’s contribution to their retirement plan are the most significant factor in boosting their success in retirement saving.

In hypothetical 29-year scenarios based on investing data, researchers found that raising an individual’s contribution rate from 3% of their income to 4% increase the final hypothetical total from $138,000 to $181,000. This result was 30% higher than keeping the contribution the same and just relying on fund selection strategy to maximize gains. That 1% boost in deferred income had a wealth accumulation effect that was nearly 100% greater than selecting a growth investment strategy and 2,000% greater than just rebalancing the portfolio periodically.

Increasing the deferral rates even more led to similarly dramatic results. When the individual's deferred income increased from 3% to 6%, the final hypothetical total increased from $138,000 to $272,000. When it increased from 3% to 8%, the final total was $334,000. Of course, these results are hypothetical and past performance does not guarantee future results.

Supersize It

And here is something else you need to consider. If at age 50 or so you find you’re a bit behind in your retirement planning, consider supersizing your contribution. You can take advantage of the “catch-up” provision, which allows you to put away more than the usual annual maximum into your 401(k), 403(b), or TSP account. The maximum amounts you can contribute to your tax-deferred retirement accounts, as well as the allowed “catch-up” amount, change every year with the tax code. However, utilizing the catch-up provision can allow you to put away thousands in additional savings each year—adding to your retirement and reducing your tax burden at the same time.

If you can’t take advantage of this strategy right away, begin increasing your contributions slowly until you meet the maximums. It’s also a good strategy to increase your contributions as soon as you receive a pay-raise or a bonus. You won’t miss the money, because you weren’t getting it before!

The catch-up provision does require a separate enrollment election, so be sure to sign up for it through your employer. If you continue working past age 65—as many people are choosing to do—you can continue to fund your employer retirement plan until you do stop working, giving you even more time to put money away.

So, the bottom line is this: Increasing your deferral rate could be the best and easiest way to grow your retirement assets. By contributing just a little more, you stand a better chance of achieving success in your overall retirement planning process.

Retirement will likely be one of the biggest expenses in your life, so make it a priority to calculate your savings goal at least once a year. Review your contributions at least annually and/or when there has been a financial or life-changing event. It will help you to stay on top of your financial planning process.