KnowHow Archive

Plan Sponsor Guide Participant Guide

Pay Raise?

Studies routinely show that employees struggle to decide how much they should save. It has become commonplace to describe saving in a retirement plan as "paying yourself." That description helps give the notion of saving a prominence it might otherwise lack.

Participants should be encouraged to consider setting aside a budgeted amount for retirement as every bit as important as paying the month's rent or mortgage—and no less mandatory. Instead, all too frequently, participants set aside how much they think they can afford to save, rather than trying to figure out how much they can afford to live on in retirement. That is a critical distinction. After retirement, many expenses are not as "discretionary" as they are in younger years.
The focus of this month's Know How is not on how much they will need, however.  Rather, it is designed to emphasize that, no matter how much you are saving now, a little bit more can make a big difference. Our example this month involves a relatively "old" participant—one who doesn't start saving until he is 40. That's not an optimal starting point, obviously. It is, however, a point at which the ability to increase one's rate of savings is perhaps better than at age 25.
We also included an assumption of retiring at 67—recognizing the extended retirement age under Social Security, and realizing that emerging demographics may make that a necessity. As always, we hope you find it useful in communicating with your participants—and, as always, look forward to your feedback.
- The Editors