Take advantage of automatic enrollment and automatic increases in contribution levels to your 401k at work to help you save for retirement.
Maximize your 401k contributions with automatic increases
According to a recent study by Vanguard (link opens in new tab) of 401k participation, they have seen “increasing use of [retirement] plan features such as automatic enrollment and automatic escalation”. Personally, I love this method of savings and often recommend enrolling in automatic increases over time.
Use a workplace 401k to save for retirement
First, look at your paystub and see what is coming out of your paycheck before it gets deposited in your bank account. Are you already contributing to a 401k? If so you may have already been enrolled in contributed to your 401k. This may appear as something like “Traditional (or Roth) 401k contribution” or “EE Elective Deferral”.
Log into your 401k account online
Next, log in to your 401k account online and look at the amount you are contributing per pay period. It’s typically a percent, and many employers set you up with an automatic 5% contribution rate.
Adjust your contribution level to an amount that’s right for you
Vanguard believes employees should save 12-15% of their income for retirement. Adjust your contribution level to an amount that’s right for you, even what you may consider a “stretch”. Many employers permit adjusting your contribution rate as often as you like. This is handy if you receive spot bonuses or commissions throughout the year and may want to increase the amount they save from this “unexpected” income.
Enroll in automatic quarterly or annual increases
You may be able to enroll in automatic quarterly or annual increases. You can set the contribution rate to increase 1% every quarter, for example, or 3% annually. With automatic increases like this, you don’t need to think about increasing your savings rate because it happens automatically. And stair-stepping the increase in savings over time helps you adjust your living expenses almost imperceptibly as well. Many times employees don’t even realize they’ve enrolled in these automatic programs, and they can make a big impact over time.
Notice how much you can contribute in a year
Be mindful of the maximum amount you can contribute to a 401k in a year, which changes with IRS requirements. Also consider whether a pretax or Roth contribution is better for you. These are things to discuss with your financial advisor to get help deciding what’s best for your personal situation.