The news shows and the news media in the US and right around the world are filled with stories about where to invest now that the election is behind us.
There are concerns about which stocks and industries will do well and which will fare poorly. The coming Fiscal Cliff, concerns about Europe and our own debt make for compelling news stories.
Is There a ‘Foolproof’ Opportunity?
What if I told you there was a simple, virtually foolproof solution to your post-election financial concerns that will work under any administration regardless of party? I should charge you a handsome sum for sharing this information, but I’m going to share it for free (I’ve always wanted to use that line).
The 1% solution is simple and it has nothing to do with Sherlock Holmes (actually the Sherlock Holmes book is the 7% Solution and has to do with his cocaine addiction).
The 1% Solution
The 1% solution is simply this. If you are not currently contributing the maximum amount allowed to your 401(k)* (superannuation) or similar defined contribution retirement plan at work, increase the percentage of your pay that you defer by 1% for next year.
This is a great time to do this because many companies are in the middle of open enrollment for employee benefits at this time of year. Even if your company isn’t, do this anyway. (The 1% idea is the brainchild of fellow financial advisor and blogger Jim Blankenship).
A Painless Way to Save
Let’s say you earn $50,000 per year. An extra 1% amounts to $500 annually. If you are paid every two weeks you earn 26 paychecks over the course of the year. This amounts to an extra $19.23 per pay period. The amount is actually less if your contributions go to a traditional 401(k) account on a pre-tax basis.
Let’s say that you earn $50,000 per year, receive a 3% raise per year, and defer an extra 1% of your compensation each year for the next 10 years. Further let’s assume that you earn 3% on your investments each year.
At the end of 10 years you would have an additional $31,000 in your retirement plan account. This is over and above any money you were already deferring or had accumulated in the account, and over and above any company match that you might receive.
How you allocate your retirement account and how the markets perform of course will influence your returns and the amount accumulated up or down. Obviously I’ve made some assumptions here, but the message remains unchanged.
If you don’t have access to a workplace retirement plan; or if you are already contributing the maximum allowed, the 1% solution can be adapted to an IRA (or similar account outside the U.S.). In fact adding an additional 1% to any sort of savings plan will benefit you. The point is to try to add to your savings each year.
You don’t have much control over external factors such as the political landscape. Control what you can control and bump up your retirement savings now while it is top of mind.
This guest post was written by Roger Wohlner, CFP®, a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Illinois, where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Follow Roger on Twitter and LinkedIn. Roger also blogs at The Chicago Financial Planner and for The Smarter Investor at US News .
General Advice Warning
The Information on this page has not taken into account your financial situation, needs or objectives. Before acting upon any advice, you should consider whether it is appropriate for you.
*The rules are different in Australia for superannuation. However, the concept of just simply saving an extra 1% of salary in your retirement account will deliver similar results.