Personal Finance
I'm being told to raise my 401(k) contribution by 1% annually — should I follow this advice?
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Financial advice abounds on the internet, some good, some bad, and some absolutely dangerous. So, how can you know which advice to follow? You could follow the brain-dead advice of financial “experts” like Jim Cramer, you could do your own research, or you could ask strangers on Reddit.
The author of our post in question went with the latter, and took his financial concerns to the community in r/personalfinance, a group of people interested in getting out of debt, budgeting, investing, and saving money.
The author of the post says that they are already contributing 15% of their earnings to their 401(k) and read that some people recommend you increase your contribution by 1% every year. They are wondering if this is sound financial advice, or if it only applies to people who aren’t contributing 15% already.
Naturally, most people recommended maximizing the amount you contribute to your 401(k). However, some other, wiser commenters added some important context: only do this as long as you can afford it. Do not sacrifice your needs today to contribute to your retirement account. You can sacrifice some luxuries and conveniences but do not force your family to suffer so you can add a little more to your savings.
Some other commenters also clarified that there is nothing magical about the 15% number, and the author must be referring to some other advice they received. The actual limit for 401(k) contributions is $23,000 per year. It doesn’t matter how you reach that amount, either by smaller but regular contributions or one large contribution. Most experts recommend reaching for this limit, again, if you can afford it, which many people cannot.
Considering that most people have no retirement savings, cannot afford to contribute to their retirement funds, and will never be able to retire, there is no “standard” contribution for retirement. Your goal and standard depend on your own financial and personal situation. Do not compare your situation to others.
Finally, other responders said that the advice to increase your contributions by 1% every year isn’t so much financial advice as it is behavior modification. It helps people keep their lifestyle creep in control by limiting how much additional income they receive every year (assuming they receive regular wage increases).
Most of the advice was generally agreeable to the idea of increasing contributions if the author had the ability to do so. But, of course, none of this is expert or legal financial advice, and you should always consult an expert before you make any big financial decisions regarding your savings and retirement funds.
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