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Taking the 1% Challenge to Better Your Future

As a Retirement Plan Coordinator in Hefren Corporate Services, I enjoy working with local business owners in managing and servicing their retirement plans, as well as educating their staffs. I usually answer a ton of great questions and am frequently asked what to do when someone who has a 401(k) plan feels they don’t have enough left over at the end of the month to put into their retirement plan.

Believe me, I get it. We all have lives outside of work, and numerous demands on our time and money. I also recognize it’s difficult to even remember to save. But when you think about it, we are so fortunate to even have a 401(k) plan! Not everybody does. Basically, it’s the fastest and easiest way to save for your retirement because your 401(k) contribution comes directly out of your paycheck and immediately placed into your 401(k) investment.

I tell people that if you are at all like me, the very second the money hits my checking account it’s designated for a need or want and already spent. So think about this: if you never saw the money in the first place, you get used to living without it. It just goes ahead and grows on its own. What could be better? Once you get comfortable letting it do what it is intended to do, go ahead and start taking the “1% challenge,” where it will really make a difference.

A Cold Hard Truth of the 1% Challenge

I love the 1% challenge because it’s so simple. You commit to increasing your 401(k) contribution every year by 1%. If you were putting in 3% before, put in 4% now. If you make $50,000 a year and are paid 26 times year that’s about $20 additional per pay period. The first couple of pays you will definitely notice, but then you get used to living without that money. Instead of paying others, your hard-earned income is paying your future self!

Of course, there are those who say they can’t afford the extra $20 coming out of their paycheck. So when people tell me that, I nerd out on them. I always liken this back to a simple cup of coffee.

The average cup of coffee in the U.S. today is $3.50. Buying one cup of coffee per day, for 30 days, costs you $105 per month or $1,260 per year. Repeat, $1,260 per year. Doesn’t that seem like a lot of money to spend per year? I am not here to judge, but am here to tell you that if put $1,260 in your 401(k) instead, with 30 years to retirement at a 6% annualized return, that $3.50 cup of coffee per day habit could potentially turn out to be $106,000 in your retirement account. That’s a big deal!

What? No More Coffee?

For those who don’t buy coffee every day and stick to a budget, that’s wonderful. You and I both know we all have a “coffee habit” per se; whether it’s eating lunch out rather than brown-bagging it, smoking tobacco cigarettes, renting on-demand cable channel movies and, worse yet, hanging on to our HBO subscription long after “Game of Thrones” has ended. If you don’t know (or don’t think you have) a “coffee habit,” of sorts, filling out a budget spreadsheet is the best way to identify the habit. In the world of online banking this should be very easy to identify. I’m not saying that you must take the joy out of your life; I’m saying over time, a little bit adds up.

Here is you can save more. I love the idea of “found money!” I don’t mean the $5 you find blowing through the parking lot – although that is a really fun one for me – I mean the extra money you get from something major occurring that will change your finances for the better.

It’s Time to Pay Yourself. You Earned It.

Think about it ... savor it ... you pay off your car, your youngest kid graduates college, you have one more payment on that annoying credit card balance. You are already used to living without that money so it’s time to pay yourself instead. You earned it! You already know what a $3.50 a day coffee habit can do. Can you imagine what the amount of your car payment every month, every year, will do for your retirement savings?

If you are not enrolled in your company’s 401(k) plan for one reason or another, get enrolled today. If they offer a match, start putting in enough money to get the full match from the company. That’s free money you’re missing out on if you don’t!

After you are set up with the plan, and you’ve been in it for a year, go ahead and take the 1% challenge. After a couple of years in the job, perhaps you will get a raise. And once more, you’re already used to living without that extra money so go ahead and increase your 401(k) contribution a little bit more in that year. You’ll be happy to know that you’re well on your way to building your retirement income without even breaking a sweat. That’s what I’m talking about!

If you are the decision-maker of your company’s retirement plans, we’d be happy to share some ideas with you. Simply call our Hefren-Tillotson Corporate Services department at 412-633-1759 for more information. We are always here to help.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.
Hefren-Tillotson Inc. is a leading diversified financial services firm providing investment and retirement plan management and comprehensive, financial planning through MASTERPLAN® for individuals and businesses. The firm’s wealth management services are administered by Certified Financial Planner (CFP) professionals, Chartered Financial Analyst (CFA) Charter holders, attorneys, Chartered Life Underwriters, and CPA/PFS’s. Hefren-Tillotson offers corporate services including 401(k) retirement planning, executive financial counseling, fiduciary reviews and workplace financial planning seminars. Founded in 1948, the firm is headquartered in Pittsburgh and has offices located in Pittsburgh, Butler, Greensburg, North Hills, and South Hills. MEMBER SIPC.