For the New Year, Resolve to Save Another 1 Percent

By Clifton Linton
Senior Writer, mPower

In This Story It's a Start What's 1 Percent Worth? Finding 1 Percent Slowly but Surely

A few weeks ago, Alex Hannah decided to give himself a little present. But, he doesn't plan to open it for another 33 years. Talk about will power.

When he recently received an annual salary increase, 26-year-old Hannah decided to save 1 percent of it in his 401(k) plan. "Every time I have a raise, I increase (my deferrals)," he said.

minute: read this article at a glance.

Technical Terms Compound interest Matching contribution

If there's one New Year's resolution that should be relatively easy to stick to, it's to increase the amount you save in your 401(k) by 1 percent of your salary. Even if it seems you are constantly strapped for cash, it may not be that hard to find 1 percent extra to set aside for the future.

So, will Hannah detect the hole in his pocket? "I'll never notice that (the money) was gone," he said.

Apparently, he's not alone.

"(401(k) plan) participants who have done this have told me 'Gee, I didn't realize how easy it would be,'" said Ted Benna, creator of the first 401(k) plan and president of the 401(k) Association.

You might wonder how significant an extra 1 percent savings can really be. On the other hand, you might wonder how on earth you could manage to put that money aside without missing it. Either way, read on to find the answers.

It's a Start

Admittedly, saving an additional 1 percent of salary probably won't be the ultimate solution for meeting your retirement goals but it's a start. And, that's the main point financial planners make: don't delay getting started, even if you eventually need to save significantly more than you are now.

"The key is to get started and to do it in stages," said Marilyn Broussard, a certified financial planner with Waddell & Reed, in St. Paul, Minn. "Do a small increase — you won't notice this. You will get used to it."

It's also important to develop a realistic plan for saving money.

When it comes to retirement planning, Americans "do two dangerous things," says Don Blandin, president of the American Savings Education Council (ASEC). "We overestimate our Social Security benefits and underestimate how long we'll live."

Estimating how much you will need isn't too difficult. The ASEC Web site offers a free Ballpark Estimate calculator that can help you. Blandin suggests using the calculator when you receive your annual Social Security statement. You can start making up any shortfalls by saving an additional 1 percent in your retirement account, he said.

What's 1 Percent Worth?

One percent of salary may seem like chump change but, as the saying goes, that's how chumps think.

"People say, 'why bother,'" said Diane Savage, certified financial planner and senior retirement education consultant with Watson Wyatt & Co. The problem, she said, is that many folks don't understand the enormous potential of that money if it's allowed to spend enough time earning compound interest.

"It's scary to think that people think that they have a better chance of winning the lottery than successfully saving for retirement," said Savage.

You are more likely to successfully reach your goals through saving, planners say. "That's the one area that you have control over in life," said Bryan Olson, director and principal researcher at the Schwab Center for Investment Research.

"You have to give up a little of the lifestyle today to have lifestyle tomorrow." — Don Blandin, president of the American Savings Education Council.

Suppose you earn $50,000 a year. One percent of that is $500. That works out to about $9.62 a week, which seems like a manageable sum.

Here's the power locked up in that amount: If you saved $9.62 a week and it earned a 10 percent return, at the end of 30 years it could be worth $82,247.

In fact, a 1 percent increase in other things you do in life can also add up.

In a fun bit of research, the Schwab Center for Investment Research, a division of Charles Schwab & Co. Inc., found that you could save about $429 if you bought a regular $1.10 cup of coffee every day instead of a $2.75 specialty coffee. For a person earning an annual salary of $40,000, that's about 1 percent of salary. But, here's the clincher — giving up the exotic coffee will also save you 82,680 calories a year! That could go a long way toward fulfulling one of the more popular New Year's resolutions ... losing weight.

Finding 1 Percent

How can you find 1 percent? It's not as hard as you think. Most of us probably fritter away 1 percent of our salary on meaningless extras.

Do you stop for a gourmet coffee every day? Buy sodas from the vending machine? Pay ATM fees because you aren't taking money from a machine operated by your own bank?

You may feel you can't afford to trim back or completely eliminate these luxuries. But, said Blandin, "you have to give up a little of the lifestyle today to have lifestyle tomorrow."

Finding 1 percent of your salary requires examining your spending habits.

"Write down every place you spent money for the last three months," suggests Broussard. And don't cheat!

Here's another thing you might try. What do you do with the change that jingles in the bottom of your pocket? Throw it on the dresser or in a jar?

Those little coins can really add up. A standard mayonnaise jar filled with assorted change is worth $50 on average, said George White, spokesman with Coinstar, a maker of change-counting machines. Indeed, $7.7 billion worth of loose change is out of circulation because it's gathering dust somewhere, concluded Coinstar in its annual National Currency poll.

Those change jars, instead of being a doorstop, could be a handy source of "found money" to give your retirement savings some extra kick. The average redemption at a Coinstar machine is $34, White said. Further, 28 percent of customers polled said they had redeemed change within the last three months.

Slowly but Surely

You may be able to cut 1 percent of salary out of your budget cold turkey, but if not, don't worry about getting there slowly.

"Shock treatment is for the bankrupt. ... I think the way to teach people to save is to do it gradually," said William Stecker, certified financial planner and owner of the Marble Group, Ltd., Divide, Colo.

"If you don't make that shift (from spender to saver) at some point in your lifetime, you are dooming yourself to poverty or having to work forever." — Ted Benna, creator of the first 401(k) plan and president of the 401(k) Association.

Alex Hannah found that out through experience. When he started his current job as an account manager of employee education with American Express Retirement Services, he had to wait a year before he could begin participating in the 401(k). When he became eligible, he was eager to make up for lost time. He deferred the maximum allowed from his paycheck: 15 percent.

"I got my first paycheck and it was extremely painful," said Hannah.

He figured out that the best strategy to reach his goal was to start small and increase savings regularly. Indeed, working in the retirement saving industry, he has seen a lot of people defer more than they were comfortable with and then quit altogether when the pain became too great.

Hannah cut back his deferral to 3 percent of salary so he could continue receiving the full company-matching contribution. Then, every time he got a raise, he boosted his deferral by an additional 1 percent. "I'm now back to 6 percent," he said.

He's using two great saving strategies: salary deferral and boosting his contributions when he gets a raise.

Related Reading Resolution Revolution: It's Never Too Late to Boost Your 401(k) Performance A Budget Can Help You Meet Your Retirement Goals

By setting aside only a portion of his raise, Hannah is able to put more money away and still have some extra to spend — and he never even misses it.

Benna points out that regularly upping retirement contributions is the first step in changing from a consumer to a saver. "If you don't make that shift at some point in your lifetime, you are dooming yourself to poverty or having to work forever," he said. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

For the New Year, Resolve to Save Another 1 Percent

By Clifton Linton
Senior Writer, mPower

In This Story It's a Start What's 1 Percent Worth? Finding 1 Percent Slowly but Surely

A few weeks ago, Alex Hannah decided to give himself a little present. But, he doesn't plan to open it for another 33 years. Talk about will power.

When he recently received an annual salary increase, 26-year-old Hannah decided to save 1 percent of it in his 401(k) plan. "Every time I have a raise, I increase (my deferrals)," he said.

minute: read this article at a glance.

Technical Terms Compound interest Matching contribution

If there's one New Year's resolution that should be relatively easy to stick to, it's to increase the amount you save in your 401(k) by 1 percent of your salary. Even if it seems you are constantly strapped for cash, it may not be that hard to find 1 percent extra to set aside for the future.

So, will Hannah detect the hole in his pocket? "I'll never notice that (the money) was gone," he said.

Apparently, he's not alone.

"(401(k) plan) participants who have done this have told me 'Gee, I didn't realize how easy it would be,'" said Ted Benna, creator of the first 401(k) plan and president of the 401(k) Association.

You might wonder how significant an extra 1 percent savings can really be. On the other hand, you might wonder how on earth you could manage to put that money aside without missing it. Either way, read on to find the answers.

It's a Start

Admittedly, saving an additional 1 percent of salary probably won't be the ultimate solution for meeting your retirement goals but it's a start. And, that's the main point financial planners make: don't delay getting started, even if you eventually need to save significantly more than you are now.

"The key is to get started and to do it in stages," said Marilyn Broussard, a certified financial planner with Waddell & Reed, in St. Paul, Minn. "Do a small increase — you won't notice this. You will get used to it."

It's also important to develop a realistic plan for saving money.

When it comes to retirement planning, Americans "do two dangerous things," says Don Blandin, president of the American Savings Education Council (ASEC). "We overestimate our Social Security benefits and underestimate how long we'll live."

Estimating how much you will need isn't too difficult. The ASEC Web site offers a free Ballpark Estimate calculator that can help you. Blandin suggests using the calculator when you receive your annual Social Security statement. You can start making up any shortfalls by saving an additional 1 percent in your retirement account, he said.

What's 1 Percent Worth?

One percent of salary may seem like chump change but, as the saying goes, that's how chumps think.

"People say, 'why bother,'" said Diane Savage, certified financial planner and senior retirement education consultant with Watson Wyatt & Co. The problem, she said, is that many folks don't understand the enormous potential of that money if it's allowed to spend enough time earning compound interest.

"It's scary to think that people think that they have a better chance of winning the lottery than successfully saving for retirement," said Savage.

You are more likely to successfully reach your goals through saving, planners say. "That's the one area that you have control over in life," said Bryan Olson, director and principal researcher at the Schwab Center for Investment Research.

"You have to give up a little of the lifestyle today to have lifestyle tomorrow." — Don Blandin, president of the American Savings Education Council.

Suppose you earn $50,000 a year. One percent of that is $500. That works out to about $9.62 a week, which seems like a manageable sum.

Here's the power locked up in that amount: If you saved $9.62 a week and it earned a 10 percent return, at the end of 30 years it could be worth $82,247.

In fact, a 1 percent increase in other things you do in life can also add up.

In a fun bit of research, the Schwab Center for Investment Research, a division of Charles Schwab & Co. Inc., found that you could save about $429 if you bought a regular $1.10 cup of coffee every day instead of a $2.75 specialty coffee. For a person earning an annual salary of $40,000, that's about 1 percent of salary. But, here's the clincher — giving up the exotic coffee will also save you 82,680 calories a year! That could go a long way toward fulfulling one of the more popular New Year's resolutions ... losing weight.

Finding 1 Percent

How can you find 1 percent? It's not as hard as you think. Most of us probably fritter away 1 percent of our salary on meaningless extras.

Do you stop for a gourmet coffee every day? Buy sodas from the vending machine? Pay ATM fees because you aren't taking money from a machine operated by your own bank?

You may feel you can't afford to trim back or completely eliminate these luxuries. But, said Blandin, "you have to give up a little of the lifestyle today to have lifestyle tomorrow."

Finding 1 percent of your salary requires examining your spending habits.

"Write down every place you spent money for the last three months," suggests Broussard. And don't cheat!

Here's another thing you might try. What do you do with the change that jingles in the bottom of your pocket? Throw it on the dresser or in a jar?

Those little coins can really add up. A standard mayonnaise jar filled with assorted change is worth $50 on average, said George White, spokesman with Coinstar, a maker of change-counting machines. Indeed, $7.7 billion worth of loose change is out of circulation because it's gathering dust somewhere, concluded Coinstar in its annual National Currency poll.

Those change jars, instead of being a doorstop, could be a handy source of "found money" to give your retirement savings some extra kick. The average redemption at a Coinstar machine is $34, White said. Further, 28 percent of customers polled said they had redeemed change within the last three months.

Slowly but Surely

You may be able to cut 1 percent of salary out of your budget cold turkey, but if not, don't worry about getting there slowly.

"Shock treatment is for the bankrupt. ... I think the way to teach people to save is to do it gradually," said William Stecker, certified financial planner and owner of the Marble Group, Ltd., Divide, Colo.

"If you don't make that shift (from spender to saver) at some point in your lifetime, you are dooming yourself to poverty or having to work forever." — Ted Benna, creator of the first 401(k) plan and president of the 401(k) Association.

Alex Hannah found that out through experience. When he started his current job as an account manager of employee education with American Express Retirement Services, he had to wait a year before he could begin participating in the 401(k). When he became eligible, he was eager to make up for lost time. He deferred the maximum allowed from his paycheck: 15 percent.

"I got my first paycheck and it was extremely painful," said Hannah.

He figured out that the best strategy to reach his goal was to start small and increase savings regularly. Indeed, working in the retirement saving industry, he has seen a lot of people defer more than they were comfortable with and then quit altogether when the pain became too great.

Hannah cut back his deferral to 3 percent of salary so he could continue receiving the full company-matching contribution. Then, every time he got a raise, he boosted his deferral by an additional 1 percent. "I'm now back to 6 percent," he said.

He's using two great saving strategies: salary deferral and boosting his contributions when he gets a raise.

Related Reading Resolution Revolution: It's Never Too Late to Boost Your 401(k) Performance A Budget Can Help You Meet Your Retirement Goals

By setting aside only a portion of his raise, Hannah is able to put more money away and still have some extra to spend — and he never even misses it.

Benna points out that regularly upping retirement contributions is the first step in changing from a consumer to a saver. "If you don't make that shift at some point in your lifetime, you are dooming yourself to poverty or having to work forever," he said. 

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.