Are you saving comfortably? Maybe it's time to up the ante…

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.

WomanLookingAtPiggy.JPGFor 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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Preet Banerjee
Preet Banerjee an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • Silicon Prairie

    That’s a great way to look at things. I would try to find out exactly how much I can live with (at least up to the RRSP contribution limit) as soon as possible, but some people might want to take it slower. As long as they’re making increasing payments they’re doing well!

  • guest

    hi preet,
    as usual a simple but powerful message from you..
    just a small insignificant observation..

    in the illustration where you increase by 10% the sequence was 100 ..110 …121

    but while the increase is 3 % it is
    100….103..106…109 etc..should it not have been



  • Preet

    Yes, you are correct – I just rounded for simplicity’s sake, but will amend to make it more clear. Thanks.

  • The Reverend

    Great example.
    I use up most of my RRSP/RPP room via payroll deduction at a fixed percentage of my salary so it increases with my pay rate.

    I also do the pre-authorized withdrawal for my church, automatically deducting peoples offerings once a month. I’d love to see them ask for "COLA adjustments" to their tithes as well, however it doesn’t quite happen that often.

    That being said, once you have the flat rate per year down pat for savings (or charitable donations), an even greater stretch would be to increase your percentage each year.

    Say this year I earn 40k and contribute 6% to savings (200 per month). Say I get a raise to 44k, then if I didn’t change my savings rate I would now contribute 220 per month. However if I stepped my savings rate up a notch as well, to say 7%, I’d now contribute 256.67 per month.

    Its really a psychological exercise but small, seemingly insignificant changes, can make a huge difference in the long haul. Consider making these chagnes on both your savings and your givings, and you’d be suprised the impact it can makk.