Save Just One Percent More

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As the National Defense Authorization Act works its way through legislative and executive approval, it looks like 2014 military base pay will go up by 1%. Housing allowances may go up depending on duty location. Estimates for the military’s annual survey of food prices project that the food allowance may go up by as much as 3.4%.

When the 2014 military pay tables are released, E-4 monthly base pay will rise by about $22 and O-3 base pay will see another ~$50/month. Again, depending on allowances, entire paychecks may go up by about 1%.

What can you do with “all of that money”? Well, it means one or two extra coffeehouse beverages… if you’re careful. Maybe an extra restaurant meal for the family each month, although hopefully one without a cheesy rat or a play place. This money is not going to make a huge difference in your quality of life, and your hedonic treadmill will flatten out again very quickly.

If you’re carrying any credit-card debt then you already know that you’re going to throw all of your extra pay & allowances at it until it’s paid off. Interest rates for student loans and vehicles might be pretty low, so that payoff decision is more of a personal choice.

But if your debt situation is already under control, is that 1% pay raise going to make a huge difference in your life? Or is it the extra cash just going to dribble out through various spending holes in your 2014 budget?

Save “1% More” Movement

CFP Jim Blankenship over at Blankenship Financial Planning knows what to do with the pay raise: start a “1% More” blogger campaign every November. Last year 30 bloggers put the word out to over 75,000 readers, and this year will be even bigger.

Here’s the crazy idea: what if you saved all of the pay increase and boosted your savings rate by one percent? According to Jim, the annual campaign gets people thinking about their retirement planning and encourages them to save just a little more.

Major media outlets are already clamoring that Americans don’t save enough for retirement. The person we are today doesn’t really have a firm grasp of how our future self will feel about our savings and retirement plans. Talk to your family’s elders or other retirees: they’ll tell you that they wish they’d started saving more and saving sooner.

If you don’t have urgent and specific plans for that extra 1%, why not put in your savings? In case you “need” it, you could always boost the size of your emergency fund. If you wanted to make the money a little harder to grab then you could stash it in your Roth IRA (no worries, you can withdraw contributions any time). If you’re really motivated to take care of your future self then you could go hard-core and boost your contributions to the Thrift Savings Plan or a 401(k).

Will that one percent really make much of a difference? Um, yeah– about one percent– but this small change has a big payoff. If you do it every year then in a decade your savings rate will have risen by a little over ten percentage points. However, in that decade the compounding of the extra savings will boost your retirement portfolio even more.

The numbers

Let’s take another look at that E-4’s extra $22/month pay raise. Let’s say that last year they saved 15% of their base pay, an amount that means they’ll be working until they’re in their 60s. They’re earning $2193.90/month in 2013 and saving $330/month– just $3960/year, well below the Roth IRA contribution limits. If they keep that savings rate constant then in 10 years they’ll have saved $39,600. If their IRA grew at a very conservative 3% over inflation, then in 10 years it’d be worth $46,758.

But if they started saving just 1% more every year after the first year then they’d save a total of $41,430– “just” an extra $1830 over 10 years. In the meantime that “just 1% more” has helped the IRA grow to a total of $48,802– an extra $2044. That’s 11.7% more total in their IRA even though they’ve saved just 1% more each year. The compounding effect of saving 1% more is starting to kick in, and every year it gets bigger.

The O-3’s been earning $5630.70/month and saving $845/month for $10,140/year– not even maxing out their Thrift Savings Plan contributions. 10 years of savings is $101,400 and investment growth yielded a total value of $119,731. By saving just 1% more each year after the first year, they ended up saving $106,087 and having a total value of $124,962.

[If you’re just starting out then don’t get discouraged by your current personal savings rates. Keep in mind that these hypothetical saving rates and stock-market returns are very conservative. In the actual military pay system during that 10 years each of these servicemembers has earned two promotions and four longevity pay raises. Maybe the E-4 even completed their degree and got a commission. In the real world you’d easily be saving much more than these amounts, and you’d be saving every annual pay raise and longevity raise and promotion pay raise. Saving just 1% more on top of that will compound even faster.]

The real difference in your retirement portfolio comes from holding down your expenses and saving the pay raises. Once you’ve learned to save just 1% more, you’ll feel motivated to save even more for your retirement. You’ll start to learn more about saving and investing while you’re in the military, and you’ll realize that you don’t want to work until you die. You’ll figure out how much you’ll need to save to reach your financial independence, and you’ll boost your savings rate to retire on your terms. You’ll choose an asset allocation plan for your investments, you’ll automate your paycheck deductions to your retirement accounts, and you’ll keep on saving.

Just 1% more. It’ll get you started, and it’ll keep you going.

Try it now:

  • Raise the amount of the automatic transfer to your savings account from your next paycheck.
  • Log in to MyPay and raise your TSP contribution by at least 1%.
  • Raise your allotment contribution to your Roth IRA.

Pat yourself on the back, congratulate yourself for improving your retirement finances, and take the rest of week off. Your future self thanks you!

Related articles:
Saving base pay and promotion raises
Simple ways to start saving
Start saving early
How many years does it take to become financially independent?
How many years does it take to reach financial independence? (calculator version)

WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

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