Financial Security Step 9: increase retirement contributions - Balanced FI

Financial Security Step 9: Increase Retirement Contributions

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Early, monthly retirement contributions are the single most important part of your long-term savings plan as you prepare for life after work. 

Waaaaay back in FSS Step 2b, you started saving for retirement. When you are saving a mini emergency fund or have debt (other than a mortgage), retirement contributions often fall to the bottom of the priority list. That’s understandable since your money can only go so far. I absolutely agree that the security of a mini emergency fund and the freedom of paying off debt are bigger issues to tackle initially. 

BUT early retirement saving is IMPORTANT

Compound interest is magical. It makes your investment grow like crazy… over time. Time is the biggest factor, which makes early investment important.

If you’re a little older and starting to freak out at this point, take a deep breath. Investing today IS early investing. Today is earlier than next month or next year.

Therefore, I recommend contributing enough to retirement to get your employer’s match (if available) or at least 3% of your annual income even when you’re getting out of debt. Starting small is still a start, and those little contributions will make a difference long-term.  If you’re unsure how your employer’s retirement plan works, reach out to your supervisor or a human resources representative.

Make sure to also ask if the plan has the option to automatically increase your contribution percentage annually. This is by far the easiest way to ease into contributing more to retirement. You probably won’t even notice the extra percentage being withheld from your paychecks. 

When to get serious about retirement contributions

After you have completed Financial Security Steps 1-8, you’re ready to get serious about retirement saving. You should have already:

  • Gotten comfortable tracking your expenses and monthly net worth changes
  • Created & learned to follow a budget
  • Saved a mini emergency fund AND a fully-funded emergency fund of 6 months’ expenses
  • Paid off all your debt (except the mortgage)

It’s important to pay off debt before ramping up retirement savings because of the interest charged on that debt. The longer you carry debt, the more interest you’re charged (AKA, the more money you are wasting). Once your debt is gone and you’re contributing more to retirement, interest becomes a good thing. 

“Getting serious” means increasing your retirement contribution rate. The recommendation is 15% of your annual income, but that depends on your current age, desired retirement age, existing retirement savings, and expected retirement lifestyle (and living expenses). 

Luckily, there are tons of online resources to help you determine how you’re doing and how much you still need to contribute.

Resources for retirement planning

My favorite website for figuring out how your savings stacks up against your future needs is Chris Hogan’s R:IQ.  You input information about your current and future situations and receive feedback on how much you’ll need to retire at that rate, as well as how much your current investments are expected to reach. If you need to contribute more, it’ll tell you exactly how much more per month is needed.  

Kiplinger has a more involved retirement calculator. It takes into account Social Security, home equity, and the aggression of your investment approach. 

If your retirement account is with a bigger provider, like T. Rowe Price or Vanguard, you’ll probably have access to a retirement calculator on their website. This source would also require fewer inputs because it will already have some of your information. 

A more personalized option is to contact a financial advisor. The National Association of Personal Financial Advisors provides a search feature to find an advisor. You can also ask for local recommendations, especially from people you know that manage their finances intentionally. Your employer’s retirement provider may also offer consultations with advisors. 

When paying an advisor, I recommend using one who is fee-only and acts as a fiduciary. A fiduciary is oath-bound to put the client’s needs first. A fee-only compensation method is more transparent than a commission-based model and has less incentive for the advisor to put their own financial interests before the client’s.

Increasing your retirement contributions

While paying off debt, you calculated your “rolling debt payment” amount. It’s the accumulation of all the minimum debt payments you owe, with additional payments being made as often as possible. By the end of your debt payoff journey, that amount was probably fairly large. 

After the debt was gone, you used that same monthly amount to save your fully-funded emergency fund of 6 months’ expenses. Now it’s time to put that amount toward retirement. 

There are different annual contribution limits for the different types of retirement accounts, so it’s important to know what kind of account you have. 

AccountForContribution Limit (2021)Monthly Contribution to Max
Roth IRAIndividuals$6,000$500
Roth 401(k)Employees$19,500$1,625
SIMPLE IRAEmployees$13,500$1,125
457(b)Government Employees$19,500$1,625
403(b)School Employees$19,500$1,625

Once you are 50 or older, you can contribute additional amounts annually to catch up. 


I recommend contributing the amount of your “rolling debt payment” + any extra you had been paying toward debt, assuming that will not put you over the annual contribution limit. You’re already used to not using that money on living expenses, so it should be a relatively easy adjustment. 

If you’re fortunate enough to be able to contribute more than the limit, you can always open up additional accounts. Of course, the account type depends on your situation. A financial advisor can help you determine the best course of action. A non-retirement account may be a good option after maxing out retirement savings, depending on your goals. 

About that 15% retirement contribution…

Should you contribute 15% of your pre- or post-tax income?

The 15% contribution should be calculated based on your pre-tax income, according to Fidelity.

What if your employer contributes?

You want to save at least 15% total, across all methods. If your employer contributes 5%, you only have to worry about the remaining 10%. Make sure you understand your employer’s retirement plan when you start formulating your strategy. 

What if I’m older when I start saving?

Unfortunately, if you delay saving until you’re older, your monthly contributions need to be higher. A financial advisor can help you figure out exactly how much you need to save, but plan on it being more than 15%. Fidelity suggests increasing savings to 18% if you delay retirement contributions to 30 (rather than 25 years old).

What if I just CAN’T contribute enough

If you’ve looked at the retirement calculators above and can’t see how to contribute that much, it’s time to reevaluate your plan for the future. 

What to do when your retirement needs outpace your contributions:

  • Look at your home equity. If you have significant equity in your home by the time you retire, consider selling it and downsizing. 
  • Try to pay off your mortgage before retiring. This will free up cash every month during your retirement. 
  • Work longer. The longer you can delay withdrawing from your retirement accounts, the longer they’ll last. 
  • Work part-time during retirement. Even a part-time income will help stretch your savings longer. 
  • Do not pay for your kids’ college. As much as student loans are a burden, they are a way to pay for education. No one is going to offer you a loan to cover living expenses during retirement. Put that money toward your savings. 
  • Scale back your lifestyle now to save for the future. Saving more now will help exponentially in 30 years. 

Do your best

I know these solutions may not be an option for everyone. If you are injured or sick and unable to work longer, you will have to get creative. Working remotely or online is an option and Social Security Disability Insurance benefits may still be available (although the monthly payments are small). The United States doesn’t provide well for its less fortunate citizens, so a more radical solution could be moving to a country with more social supports. 

You can only do your best. The earlier you start, the better, but don’t get discouraged. Circumstances can change, hopefully for the better, before you’re old enough to retire. 

What about social security

In short, don’t count on Social Security for your retirement income. According to a 2020 Social Security Administration report, the fund for Old-Age and Survivor Insurance is only expected to be able to pay benefits until 2034.

That means that even if you retire in 2021, your benefits will run out in 13 years. There’s always a chance the government will make a huge (necessary) overhaul to the system but don’t plan on it. 

The uncertainty and fiscal irresponsibility of our government make it essential that you save for retirement as if Social Security doesn’t exist. If you somehow get benefits, it will be a bonus. 

Make retirement savings a part of your life

If you thought debt payoff was a slow process, retirement savings is even slower. Even if you start early enough, it can take 40 years to meet your goal (but the monthly amount is luckily smaller). Retirement savings is a long, long term goal, so it’s best to automate it as much as possible.  You don’t want to get bored or obsessed with the details and make unnecessary changes. 

Never seeing the money in your checking account makes it mentally easier to live without it and stick to your retirement goals. It’s OK if it takes a while to get to your monthly contribution goal, just keep working toward it. 

Do you know how much you need to save for retirement each month?

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