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The tiny change that can leave you much better off in retirement


At every stage of life, saving for retirement often falls far behind other competing goals. How can you set aside money for something that is 40 years away when you want to buy a house, have a wedding coming up or have yet to make a noticeable dent in your student loan balance?

Well, new numbers from Fidelity Investments show that increasing your savings rate by even 1 percent can make a big difference in retirement —  especially for people who are still in their 20s.

Take a 25-year-old worker earning $40,000 a year. Increasing her savings rate by one percentage point now, which would amount to about $33 a month in the first year, could lead to an additional $190 a month in retirement, according to Fidelity’s report. (The analysis assumes that the worker will retire at 67, that his or her wages grow by 1.5 percent each year and that the savings are compounding over time with annual return of 5.5 percent.)

And the more often she works in these tiny boosts, the bigger the impact. For instance, if that saver could increase her savings rate by one percentage point each year for 12 years, her income in retirement would grow substantially — leading to an extra $1,930 a month.

Even working in minor increases from time to time, say every five years, can have a notable effect by the time she reaches retirement. If she increases her savings rate by one percentage point every five years for a total increase of five percentage points over 25 years, she could still end up with an additional $690 a month in retirement, according to Fidelity.

The findings are similar to other reports finding that saving even a little bit at a young age can have a big payoff for people by the time they reach retirement age. For instance, a study by the Employee Benefit Research Institute found that a person who waits until he’s 40 years old to save for retirement could need to set aside more than twice as much of his pay than he would have if he had started saving at age 25. (That assumes the worker wants to have a 75 percent chance of having enough money in retirement.)

So how do you know when you’re saving enough? Financial advisers generally recommend saving 10 percent to 15 percent of pay, including any employer match. Though some advisers recommend workers go beyond those guidelines to make the maximum 401(k) contribution allowed by the IRS, which is $18,000 a year for most workers and up to $24,000 a year for people age 50 and up.

Some people may be nudged to save more by the realization that they are falling behind in terms of how much they should have saved. A separate guideline from Fidelity suggests that workers who want to retire at 67 should save one times their salary by age 30, three times their pay by age 40 and 10 times their salary saved by age 67. It’s worth noting, of course, that the guideline would need to be adjusted based on when a person plans to retire and how much he or she expects to spend in retirement.

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