If you’ve been following my content, you’re probably already aware of what “Auto to the 5th Power” is. As a quick reminder, Auto to the 5th Power is a set of five automatic retirement planning tools.
Today we’ll be discussing the third feature in this collection of fiduciary tools: 10-1 Now. This concept is actually the one I believe to be most important among all of the features in Auto to the 5th. So what does 10-1 Now mean?
On average, most people would agree that you should save 10% of your annual income to build up adequate retirement savings. But when I stand in front of your employees, how many of them will realistically be willing and able to put away that amount? Probably not as many as you’d like.
Yet a lot of people, your employees included, likely don’t realize that there’s more than one way to reach this 10% savings goal. To illustrate this, I’d like to share the examples of three hypothetical employees: Susan, George, and Morgan.
In this scenario, Susan is able to begin saving 10% of her annual income right away. She continues to do this for each of the 35 years before her retirement. Based on some very reasonable projections of asset growth, Susan is likely to end up with about $445,000 in retirement assets.
Susan’s friend George realizes he should be saving 10% each year as well, but just isn’t in the position to do so. So George decides to put aside 5% in the first year he begins his retirement savings, and then increase that amount by 1% each year for the next five years. This is the 10-1 Now method, and eventually this strategy will allow George to start saving 10% on an annual basis. And by 65, the same age at which Susan retired, he will have about $405,000.
Lastly, there’s Morgan. Morgan is in a similar position as George was when he began saving. She starts saving 5% annually with the intention of increasing her savings 1% each year for five years, like George did, but fails to follow through on that goal. She continues saving just 5% each year until age 65, and is left with $225,000. I call this last savings path, the one Morgan followed, the “$200,000 mistake.”
By not increasing her contributions, even by just 1% each year, she missed out on about $200,000 in savings.
Unfortunately, most of your employees will follow this same path. They will never increase their contribution on their own, because it’s a habit that people are generally poor at forming. But using automatic escalation to enroll your employees into the 10-1 Now method can help more of them succeed in reaching that 10% savings goal.
Every year on January 1, you can send a notice out to your employees letting them know that you will be increasing their deferral percentage by 1%. That said, they are welcome to opt out if they prefer not to let this occur. You would be shocked by the number of people who will choose to engage in this saving strategy, though, when they are automatically enrolled. Ultimately, the 10-1 Now rule can be massively beneficial to your employees.
If you have any other questions or would like more information, feel free to give me a call or send me an email. I look forward to hearing from you soon.