Work for an organization that offers a 401(k) plan. You may be eligible to participate in one of the most beneficial and effective employee perks available today. Since auto-escalation is a standard feature in many modern 401(k) plans, it’s essential to understand how it works to take full advantage of this employee benefit. Your employer may offer various benefits as part of their 401(k) plan. Still, none are quite as beneficial as auto-escalation. Read on to learn more about this innovative employee perk and how it can help you achieve your long-term financial goals sooner rather than later.
Auto escalation is a feature that allows you to increase your 401(k) contribution rate on a pre-determined schedule. For example, suppose you choose to participate in your company’s auto escalation plan. In that case, you could increase your 401(k) contribution by 1% every six months so that it climbs from 6% to 10% over several years. You can also increase your 401(k) contribution at specific intervals, such as every year, every two years, or every five years. Regardless of how often you choose to increase your 401(k) contribution rate, it will significantly increase the amount of money you save for retirement.
As noted above, auto-escalation is a feature that allows you to increase your 401(k) contribution rate on a pre-determined schedule. This could be quarterly, semi-annually, or yearly, depending on your plan. You can also increase your contribution manually (or revert back to your previous rate) at any time. The amount you increase your 401(k) contribution rate varies widely depending on your plan. While many plans allow participants to increase their rate in 1% increments, others allow you to increase your rate in as high as 5% increments. That being said, the higher the increment you choose, the longer it will take you to reach your retirement savings goal.
Increasing your 401(k) contribution rate is one of the easiest — and most effective — ways to quickly grow your retirement savings. For example, if you were to increase your 401(k) contribution rate by 1% every six months over 10 years, you would save an extra $25,000 — or 25% — towards your retirement. That’s an extra $25,000 you would not have saved had you remained at your initial contribution rate. And while $25,000 may not seem like a lot, it can go a long way toward helping you achieve financial security during retirement.
You can do a few simple things to increase your 401(k) contribution rate and maximize the benefits of your company’s auto escalation plan. First, if you have not already done so, enroll in your company’s 401(k) plan as soon as possible. It is never too early to start saving for retirement, and the sooner you begin saving, the less you will have to contribute in the long run. Second, if you have several 401(k) plans available to you — such as a Roth 401(k) and Traditional 401(k) — give serious consideration to contributing the highest amount possible to your Roth 401(k). This will allow your contributions to grow tax-free, which means you will have more money in your pocket come retirement. Finally, review your plan every year or two to ensure you are still adhering to your company’s auto escalation schedule. It is easy to forget to increase your contribution rate if you do not pay attention, which could cost you significant retirement savings over time.
In addition to offering you valuable tax deductions and helping you diversify your retirement savings, your company’s 401(k) plan likely offers a variety of employee benefits that make it easier to save for retirement. Among these employee benefits is auto escalation, which allows you to increase your contribution rate on a pre-determined schedule. 401(k) auto escalation is a feature that makes it easy to increase your retirement savings. All you have to do is remain consistent with your contribution rates, and you will see the benefits of this employee benefit in no time.