Yellowstone Financial, Inc.

Your Fiscal Cliff and the One-Percenters

Now that the election is behind us, we’re left to divine the income tax and government spending situation for 2013 and beyond.  The stock market is going through a bout of Monday morning indigestion rattled by bellicose statements of national leaders about the fiscal cliff.  It’s easy to get caught up in the debate and even dread the thought of continued political sclerosis that’s been the hallmark of the last eighteen months.

Rather than trying to predict the outcome, consider your own personal fiscal cliff — more generally known as retirement.  Think about it.  You go from receiving a regular salary from work and then once you stop it goes to zero.  That’s a precipice that dwarfs the fiscal cliff.  While you probably qualify for Social Security, for most it will replace half of your pre-retirement income if you’re lucky.

How should we gracefully ease over our own fiscal cliff?  Save a little from every paycheck.  The easiest way to do this is your retirement plan at work.  I’m not talking about a radical change like going from zero to $15,000 in annual savings.  This might impose such an economic shock on your household GDP that you quickly reduce your 401(k) contributions never to save again.  That’s not what we want.

You’ve heard of the “99 Percenters.”  You can become a different kind of “1 Percenter.”  It’s a sustainable path that will help lead you to a successful retirement, not one that mandates countless ramen dinners interspersed by budget-busting binges to break the boredom.   For 2013 increase your plan contribution by one scant percent.  If you’re putting five percent of your pay into your retirement plan, move it up to six percent.

While this modest proposal may seem woefully meager, it can make a big difference.  Assume you earn $70,000 and are paid every two weeks.  That one percent will result in $700 in additional retirement savings.  Your paycheck would be reduced by a measly $19.

What does it give you?  If you put aside an extra $700 a year for the next thirty years, you would end up with over $46,000 assuming 5 percent annual return.  This doesn’t include the employer match, which could double the power of the one percent and would leave you with over $92,000.

Next year go a step further and bump up your contribution by another percent.  Then every year increase it again.  You won’t miss the money, but the difference upon retirement is profound.  Imagine the same thirty year scenario as above, but instead of holding your contributions steady you increase it an additional one percent each year.  That $46,000 transforms into over $500,000.

Right now you probably have that annual retirement plan enrollment form in your inbox.  Unless you’re at the maximum $17,500 for next year, go ahead and bump it up by one percent.  Resolve to do it again next year.  You won’t notice the pain for long and its value to your financial security will be immense.

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Next month I’ll cover the changes on tap for next year as we work our way through the fiscal cliff.  For a preview, I will be giving a lunch talk on the fiscal cliff to the Boulder Valley Rotary Club next Tuesday, November 27th at noon at the Spice of Life Event Center at 5706 Arapahoe Avenue in Boulder.  For more details, see bvrc.org or Boulder Valley Rotary on Facebook or Meetup.

Dave Gardner is a certified financial planner with a practice in Boulder County.  He can be reached at yellowstonefinancial.com.  Thanks go to fellow fee-only financial planner Jim Blankenship for the 1% Challenge.