Employer Update

Many employees are seeing a bump in their paychecks this summer. As an employer, you can help workers create a more comfortable retirement by encouraging them to “save the raise”—or at least a fraction of it—in their defined-contribution retirement accounts.

While employees may feel an urge to splurge with the extra dough in their paychecks, a more balanced approach calls for putting at least some of the raise toward the future.

For example, if you offer the Commonwealth of Virginia 457 Deferred Compensation Plan, you can help employees:

• Take stock of their current finances. This Paycheck Calculator can aid in determining how saving a little more before taxes will affect one’s paycheck. Taxes are deferred on both contributions and earnings, allowing the employee to pay less in taxes now.
• Understand the impact that increasing their savings now will have on their financial resources at retirement age. The Savings Boost calculator makes it easy.

Here’s a savings scenario that you may want to share with employees this summer. It demonstrates how they can use the Savings Boost calculator to strategize a plan for their future.

Encourage Employees Right Now to ‘Save the Raise’

If employees are receiving a raise, ample evidence exists that saving even a small fraction of that raise can have a potent effect on a retiree’s financial health.

To illustrate, imagine that Krystal, a 40-year-old worker earning $40,000 per year, receives a 5% raise, making her new salary $42,000. Her gross pay will increase by $166 per month.

Let’s suppose Krystal currently has $35,000 in her Commonwealth of Virginia Deferred Compensation Plan account and decides to increase her current contribution of $25 per pay period by another $25 per pay period— which still leaves room for enjoying the lion’s share of that raise now.

Earning 5% annualized interest, what would her savings have grown to by the time she retires at age 65? The Savings Boost calculator offers a projection.*

Without the boost, Krystal’s account would be forecast to grow to $85,933. With that $50 monthly boost this year, the pot would grow to $103,065— a difference of $17,132.

That’s a significant boost. But Krystal can grow her assets even faster if she commits to “save the raise” amount every year. If Krystal increased her contribution by $50 per month each year until she hits 65, her pot would grow to a projected $266,228–an increase of $180,295 over her predicted pot without any annual increases to her contributions.

That’s a great return in exchange for giving up only a small fraction of a raise today.

* For illustrative purposes only. Actual investment returns and future account balance may be higher or lower.