Objective information about financial planning, investments, and retirement plans

Need Post-Election Financial Advice? Try the 1% Solution

Share

The cable news shows and the news media are filled with stories about where to invest now that the election is behind us.

English: Statue of Sherlock Holmes in Edinburgh

There are concerns about which stocks and industries will do well and which will fare poorly.  The coming Fiscal Cliff, concerns about Europe and our own debt make for compelling news stories.

What if I told you there was a simple solution to your post-election financial concerns that will work under any administration regardless of party?  I should charge you a handsome sum for sharing this information, but I’m going to share it for free (I’ve always wanted to use that line).

The 1% solution is simple and it has nothing to do with Sherlock Holmes (actually the Sherlock Holmes book is the 7% Solution and has to do with his cocaine addiction).

The 1% Solution

The 1% solution is simply this.  If you are not currently contributing the maximum amount allowed to your 401(k) or similar defined contribution retirement plan at work, increase the percentage of your pay that you defer by 1% for next year.  This is a great time to do this because many companies are in the middle of open enrollment for employee benefits at this time of year.  Even if your company isn’t, do this anyway.  (The 1% idea is the brainchild of fellow financial advisor and blogger Jim Blankenship).

A Painless Way to Save For Retirement

Let’s say you earn $50,000 per year.  An extra 1% amounts to $500 annually.  If you are paid every two weeks you earn 26 paychecks over the course of the year.  This amounts to an extra $19.23 per pay period.  The amount is actually less if your contributions go to a traditional 401(k) account on a pre-tax basis.

Let’s say that you earn $50,000 per year, receive a 3% raise per year, and defer an extra 1% of your compensation each year for the next 10 years.  Further let’s assume that you earn 3% on your investments each year.

At the end of 10 years you would have an additional $31,000 in your retirement plan account.  This is over and above any money you were already deferring or had accumulated in the account, and over and above any company match that you might receive.

How you allocate your retirement account and how the markets perform of course will influence your returns and the amount accumulated up or down.  Obviously I’ve made some assumptions here, but the message remains unchanged.  Adding an additional 1% to the amount that you are deferring into your retirement account is a simple, painless way to increase your wealth no matter what the market or political environment.

You don’t have much control over external factors such as the political landscape.  Control what you can control and bump up your retirement savings now while it is top of mind.

Please feel free to contact me with questions about financial planning and saving for retirement.

Photo credit:  Wikipedia

Enhanced by Zemanta