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  • Writer's pictureRyan Frailich, CFP®

Getting the Retirement Match is a Floor, Not a Ceiling

Updated: May 24, 2018

One of the most common misconceptions I come across is people saving exactly enough to get the retirement match from their employer. People hear that their employer matches say 4%, so they save exactly that amount and move on So, what’s the problem?

Getting the match should be the floor of what you save, not the ceiling.

Especially for people who are just starting out, it’s nearly impossible to say the “right” amount of savings. It’s unique to your timeline, how aggressively you invest, how well you keep lifestyle creep in check, and a zillion other things that will unfold over a 30+ year timeline. But, it’s safe to say that for most people, saving just 8% of your income, as would occur with the example above, would not be nearly enough to retire on.

Why do so many people stop once they are saving at least enough to get the match? This is a clear case of the anchoring effect, a cognitive bias where humans latch on to the first bit of information they have to make a decision, and everything else is now seen in comparison to that anchor. A car dealership gives some price for MSRP, say $28,000, and then you feel like you got a great deal when you pay $22,000? That’s the anchoring effect. In the same way you didn’t really know how much you *should* save for retirement, you don’t (err, most of us) don’t know how much that car is *really* worth. But, using the initial piece of information as an anchor lets us feel good about our decision.

“This car is worth $28,000, but I paid $22,000, therefore I made a good decision.” -*pats self on back for being a good negotiator*

“My employer matches up to 4% of my salary in retirement, so that must be the amount I should save.” -*pats self on back for being responsible*

We’re very rarely conscious of ourselves being impacted by this anchoring, but it’s everywhere. So how do you move beyond the anchoring effect to get your savings up to the 15% or so that most financial planners recommend? (To be clear, the 15% is more of a guideline than what I’d call a rule.)

Save Your Raises. When you’re starting out and getting on your feet financially, more than the bare minimum can seem daunting. You’ve got student loans to pay off, an emergency fund to build, and a host of other financial goals you’re working towards. The easiest way to boost retirement savings rate is to take it out of raises. When you get a 3% raise at work, nudge your savings rate up at least 1% and you’ll still take more home.

Automate Future Increases. Most people feel like they couldn’t possibly save more if you asked them to start today, but if they commit to saving more in 6 months, that’ll be no problem. Many payroll systems will let you automate this, so you can set up your savings to increase 6 months from now. If you’re making $60,000/year, a 1% increase is $600 per year, or about $25 per paycheck. You’ll barely notice.

Link Paid off Debts to Increased Savings Most people starting out end up with a variety of debt payments, from student loans to cars and otherwise. Each time you eliminate a debt is a time to up your savings. If you just eliminated a student loan that was costing you $200/month, it’s a great time to put $100 toward long term savings and the other $100 toward other financial goals. Over time this will build up into a dramatically higher savings rate.

If you’re a teacher, open enrollment for benefits is likely now, or coming up within the next two months. Now’s the time to nudge that rate up so your future self gets anchored to a savings rate of 7 or 8 or 10%, rather than the bare minimum you likely are sitting at right now.

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