How to trick yourself into saving money in your 401(k)

By Scot Herrick | Personal Finance

Apr 27

Saving money isn’t easy, especially for something so way out there, like, you know, retirement. Yet the more you save right now, the better position you will be in the future. Compound interest from saving early means something and what it means is more security and choice the closer you get to retirement.

There are a few tricks you can do to add money to your 401(k) and help build your portfolio.

Get the 401(k) company match

OK, so this isn’t a trick. It’s a straight-out “do this” step. If your company is matching your 401(k) savings, you are simply giving away dollars that have no risk associated with them. Yes, many companies have stopped matching employee savings, but most have not. Any time you can earn $50 on your $100 savings investment, it is a good thing.

The deal on company matches is that they don’t go far enough. Your maximum contribution for 2010 if you are under the age of 50 is $16,500. Most of us won’t hit that level with simply being at the company match level of savings. So we need more.

Put your raises to your 401(k) contribution

A simple way to increase your contribution is to take your raise and add it to your 401(k) instead of adding it to your take home income. Again, some companies are not giving you raises, but most are. Taking these raises and adding them to your contribution means you live this year just like last year. But the raises, like compound interest, add up over time to the point where your contribution matches the maximum allowed under the law.

Personal incomes haven’t gone up that much for a long, long time either. So this will not necessarily be easy. It is a question of your priorities. And to be fair, most of our priorities don’t include saving for retirement — which will bite us in the end.

Change your contribution to max your 401(k) with your bonus

If you receive bonus payments as part of your income, you will usually know the amount of the bonus with enough time to change your 401(k) contribution percentage to take most of your bonus. Immediately after the bonus is paid, you change your 401(k) contribution back to your original level.

The Extraordinary Power of Compound Interest drives this home:

For example, if 20-year-old Britney makes a one-time $5,000 contribution to her Roth IRA and earns an average 8% annual return, and if she never touches the money, that $5,000 will grow to $160,000 by the time she retires at age 65. But if she waits until she’s my age (39) to make her single investment, that $5,000 would only grow to $40,000. Time is the primary ingredient to the magic that is compounding.

This takes some work and perhaps a bit of help from your Human Resources department. Let’s just say that adding a $5000 bonus to your paycheck gives you the opportunity to change your contribution from, say, 10% normally to 25% for this one paycheck so that most of the $5000 goes into your 401(k). Now, I made up the 10% and 25% numbers…which is why you need to work through the math to get it right for your situation.

No bonus? No raise?

In the end, you may not have raises or bonuses to help up your 401(k) contribution. In that case, pick a number based on what you can afford and have that additional money taken out of your paycheck towards your 401(k). Maybe it is only $100 a month, but like compounding interest, it adds up over time.

Your savings = your retirement comfort

Pensions are going by the wayside. For all we know, the matching contributions from companies will go the same way. Outside of Social Security, which can give you a base income, all that is left for you in retirement is what you save and how you invest. It starts with getting dollars into your 401(k) account.

Has your company taken away their matching contribution? Are they putting it back?