How Much of a Difference Does Upping Your 401(k) by 1% Really Make?
Written by
G. Brian Davis
Edited by
Zuri Anderson
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Do small differences in savings really pile up over time? Can they really make or break your retirement nest egg?
“A one-time boost of 1% to your 401(k) will have a small impact, but where you really see compounding effects is when you increase it by 1% each year,” explained financial planner Jay Zigmont of Childfree Trust.
Here’s how the math on that breaks down for a typical middle-class earner.
Steady Income Example
When you use a compound returns calculator like this one from Investor.gov, it assumes a consistent monthly investment over time.
Say for example that you earn $80,000 a year, and you contribute 5% of your monthly earnings ($333.33) to your 401(k) account. If you earn an average 10% annual return, after 20 years you’d have $229,098. After 30 years you’d have $657,970, and after 40 years you’d have $1,770,353.
Now imagine you bump that investment to 6% of your monthly income, or $400 (less than $67 more each month). After 20 years you’d have $274,920, after 30 years you’d have $789,571, and after 40 years you’d have $2,124,444.
The longer your investments have to compound, the wider those differences get. A 1% bump only creates about a $46,000 difference after 20 years, but after a 40-year career it makes more than a $350,000 difference.
Of course, most people don’t earn exactly $80,000 for 40 years straight. Their income grows over time, as their skills and responsibilities grow and the value of the dollar drops from inflation.
Growing Income Example
Imagine you start out earning $50,000 a year, and then get a 4% raise every year thereafter. After 20 years of working, you earn $105,342. Give that career 30 years and you’re earning $155,933, and if you work 40 years you’re earning $230,818 at the end of your career.
Continuing with the example of a 10% return compounding annually, your 401(k) account would have $207,917 after 20 years of 5% contributions. After 30 years you’d have $651,109, and after 40 years you’d have $1,854,336.
If you invested 6% instead, you’d have $249,501 after 20 years, $781,330 after 30 years, and $2,225,203 after 40 years.
Again, that’s not a huge difference after 20 years (around $41,000), but after 40 years it’s nearly $400,000.
“Aim to increase your 401(k) contribution each year as you get raises,” urges Zigmont. “If you can invest your entire raise, do it, but even if you just invest a portion of your raise, that will make a real difference after decades of compounding.”
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