Small increases in retirement savings go a long way

The chart below illustrates the difference between steadily saving 5% of income in a employer-sponsored retirement plan, and starting at 5% but increasing contributions 1% annually until the recommended goal of 15% of income. It assumes $40,000 starting income with 2% annual raises; 6% annual portfolio return.

It just goes to show that ratcheting up retirement contributions on a regular basis is one of the easiest ways to build wealth, and timing an increased savings rate with a raise or bonus is a relatively painless way to do so. It’s perfectly fine to start off small when your career is starting out, but the math shows that having a plan to increase saving rate over time pays off.