Usually when the new year rolls around, I will suggest to my clients who are saving through PAC plans (Pre-Authorized Contributions) to increase their regular contributions by a set percentage (usually by inflation if not more). The main reason is that they have normally gotten used to their regular savings activities, and while there may have been some "teething" problems at the beginning, maybe now it is not "cramping their style" anymore.
For example, let’s say someone set up a $100/month savings plan at the beginning of 2007. Come the New Year, I would ask them if they would like to try saving $110/month for a few months. The next year, we might increase to $121/month (a 10% increase over 2008), and so on. These baby steps are much easier to adjust to and over time it can make a big difference to one’s retirement planning.
For example, let’s look at someone who saves $100/month starting at age 18 until age 65, assuming a 7% rate of return (no tax calculations for simplicity). At retirement they will have amassed $409,739.
If they had increased their monthly contributions by 3% every January 1st ($100.00, $103.00, $106.09, $109.27, etc), then with not much extra "pain" they would have amassed $623,332 at age 65. This is a difference of over $200,000.
So you can see, even a small change can make a big difference. If you are saving through automatic contributions, why not try increasing those contributions by a few percent? You can always switch back if it is too much of a stretch, but if you can handle it – you’ll be that much closer to retirement!
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If you like this blog, you might like my book:
RRSPs: The Definitive Book on Registered Retirement Savings Plans