Retirement planning wisdom that financial planners give their clients often falls short of rocket science: Spend less now so that you can invest more for later. But as a matter of practicality, many find it difficult to squeeze extra money out of their budgets to do either.
One practice I often share with my clients is to adjust their retirement contributions when they experience a pay raise. Here are three pay raises that we often overlook as opportunities to improve our retirement outlook.
Daycare expenses: For working parents with young children, the cost of daycare is a necessary evil. No one feels a pay raise quite like a parent on the first day of kindergarten. Yes, after-school care is often still a part of your budget, but it is a relief not to have to pay nearly as much as full-time care.
This August, I challenge every parent whose child goes to kindergarten to log into their 401(k)s and increase their retirement contributions. Investing a few hundred dollars more on a monthly basis can translate into tens of thousands of dollars over the course of rest of your working career.
Whether you choose to allocate all of that expense toward retirement or split it between retirement and paying off your debts, this pay raise presents an opportune time to accelerate your progress towards some of your financial goals that currently move at a snail's pace.
Promotions and bonuses: All too often, pay raises and promotions tend to result in increased living expenses instead of increased savings. Whether it is moving to a new ZIP code or purchasing a new vehicle, people often choose to reward themselves for today's accomplishments with things that retard progress toward tomorrow's retirement goals.
One way to guarantee that your retirement gets a raise every time you get one is by setting your retirement contributions as a percentage of your pay versus a dollar amount. Contributing a set percentage ensures that your retirement contributions automatically increase in tandem with your pay. And, as you progress in your career, make sure to increase the percentage of your pay that goes to these accounts. Doing so not only helps you prepare for retirement, but it also provides tax deductions to help offset the increases in income.
Graduations: Parents of college students know that along with tuition and fees, there are costs associated with housing, transportation, and all the other miscellaneous expenses for college-aged children. In spite of all the costs, there is light at the end of the college tunnel: graduation.
Even though you may still choose to help your child get started in life to some degree, by and large, graduation represents a pay raise for most parents. This milestone presents a great time for parents to get aggressive with their retirement contributions. This is the point when you should adopt the mantra “the company match is my minimum.” For too long you've sacrificed your retirement with the tradeoff of a better life for your children. Now is the time to significantly increase your retirement contributions by the amount that you were spending on Junior's college apartment, groceries and gas money.
While finding extra money to increase your retirement contributions may seem impossible today, remember that your current circumstances are only temporary. Plan ahead and look for ways to increase your retirement contributions by identifying different milestones in your life. By making conscientious changes along the way, you will improve your chances of preparing for a retirement experience that you can enjoy.
Life is a journey. Plan for it.