Dave Gardner: Your fiscal cliff -- and the 1% Challenge
Now that the election is behind us, we're left to divine the income tax and government spending situation for 2013 and beyond.
The stock market is going through a bout of Monday morning indigestion rattled by bellicose statements of national leaders about the fiscal cliff. It's easy to get caught up in the debate and even dread the thought of continued political sclerosis that's been the hallmark of the last 18 months.
Rather than trying to predict the outcome, consider your own personal fiscal cliff -- more generally known as retirement.
Think about it. You go from receiving a regular salary from work and then once you stop it goes to zero. That's a precipice that dwarfs the fiscal cliff. While you probably qualify for Social Security, for most it will replace half of your pre-retirement income if you're lucky.
How should we gracefully ease over our own fiscal cliff? Save a little from every paycheck. The easiest way to do this is your retirement plan at work. I'm not talking about a radical change like going from zero to $15,000 in annual savings. This might impose such an economic shock on your household GDP that you quickly reduce your 401(k) contributions never to save again. That's not what we want.
You can become a different kind of "1 percenter." It's a sustainable path that will help lead you to a successful retirement, not one that mandates countless ramen dinners interspersed by budget-busting binges to break the boredom. For 2013, increase your plan contribution by 1 scant percent. If you're putting 5 percent of your pay into your retirement plan, move it up to 6 percent.
While this modest proposal may seem woefully meager, it can make a big difference. Assume you earn $70,000 and are paid every two weeks. That 1 percent will result in $700 in additional retirement savings. Your paycheck would be reduced by a measly $19.
What does it give you? If you put aside an extra $700 a year for the next 30 years, you would end up with more than $46,000 assuming 5 percent annual return. This doesn't include the employer match, which could double the power of the 1 percent and would leave you with over $92,000.
Next year, go a step further and bump up your contribution by another percent. Then every year increase it again. You won't miss the money, but the difference upon retirement is profound. Imagine the same 30-year scenario as above, but instead of holding your contributions steady, you increase it an additional 1 percent each year. That $46,000 transforms into over $500,000.