By Scott Hosopple
Excuses, excuses. Long before "the dog ate my homework," humans were procrastinating and otherwise messing up -- always with some excuse or another. We all know it's counter-productive, but we do it anyway.
You can put off cleaning the bathroom or mowing the lawn without severe problems. But putting off your retirement contribution increases could have harsh, tangible consequences. Picture yourself at age 60 when you realize you'll need to work another 15 year's before you retire. You get the picture.
Don't let excuses keep you from upping your contributions. Fight each of these flawed assertions:
5. I didn't get a raise, so I don't have any extra money to increase my contributions.
Actually, increasing your contribution by one or two percent probably won't make much of a dent in your take-home pay. For example, if you make $50,000 per year, a one-percent increase in savings works out to be approximately $42 extra, pre-tax savings per month. If you make $100,000 per year, it's approximately $84 extra, pre-tax savings each month. You could likely make small cuts to your monthly budget that would easily allow you to accommodate a small increase.
On the other hand, even a small amount of money can grow much larger with time and the benefits of compounding.
4. The market is too unstable right now, so additional 401(k) contributions would just be a waste of my money.
The market is always subject to fluctuations. If you consistently make contributions, you'll help set yourself up to reap the benefits of dollar-cost averaging. And if you increase your contributions each year, you could potentially set yourself up to reap more benefits.
3. Instead of increasing my 401(k) contributions, I'm increasing the dollars I contribute to my kids' college funds.
Your kids can apply for scholarships and student loans. They can go to community college for two years before moving on to a state school. They can get a job and attend college part-time or even take a year between high school and college to work and save money.
Retirement doesn't work the same way. There aren't scholarships or low-cost, government-subsidized retirement loans. Taking a year to save extra money merely means delaying retirement and doing the same thing you've done for the past 40 years. And that's only if you're healthy enough to do so.
If you can afford to execute your retirement strategy in full and still save money for your kids' 529 account, great. But if you have to choose between them, this is a time to be selfish. Your kids will thank you when you're at retirement age and you can babysit the grandchildren because you're not at work!
2. I'm really good at playing the market, so I don't need to contribute more to my 401(k). I'll increase my 401(k) balance by quite a lot with good investing moves.
No, no, no, no, no. In order to chase big gains you are going to have to take on significantly more risk, which could turn into big losses at just the wrong time. A big loss in your retirement savings could mean significantly delaying retirement and working until poor health or old age forces you to quit. At that point you may still lack enough funds to support yourself. Plus, retirement accounts are not designed to accommodate day trading. Fees from heavy trading in a 401(k) account will eat into your returns.
A diversified asset allocation based on your specific needs and investing style should allow you to take advantage of gains across several investing categories while still mitigating risk. Steady contributions coupled with steady increases of your contribution level will help you sleep easier at night.
1. One year won't make a difference. I have plenty of time before retirement, so I'll start increasing my contributions next year.
Each year you're invested offers the possibility of compound growth. The more money you put in the pot each year, the greater your potential growth. So delaying by even one year isn't wise. Keep increasing your contributions yearly, even if it's only by a small amount.