Are you eagerly anticipating a year-end raise or perhaps even a promotion? You might already be able to imagine this: your boss invites you into his office and places a white envelope on his desk toward you. You thank him warmly and think, “Whew. This will solve everything.”
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looks familiar? If you ever find yourself saying, “If I get this raise, I will save more money,” or “If I earn more, I can pay off all my debts and Then I’ll take more to invest.”
The amount of money you make doesn’t always guarantee that you’ll have $2 million or more in the bank when you retire.
Now, it is worth noting that there is no specific definition of “financial success.” What does that mean to you? achieve a specific net worth? Own a wagon, three boats, and a corvette? This is all relative, but earning more does not always guarantee that you will “get there”. Let us determine why and help you get where you need to go.
Reasons why salary increases do not guarantee long-term financial success
Promotions and raises are not always a financial fatality. Let’s go over some of the obstacles that tend to get in the way.
Reason 1: Lifestyle creep begins.
You’ve likely heard of lifestyle creep, which involves treating past luxuries as necessities while making more money. In other words, let’s say you suddenly decide that you now need your previous vacation once every five years every six months because you’re feeling a flood of cash.
Lifestyle creep can erode larger financial goals like saving for emergencies, putting money into a retirement account, or saving for other important things, like a down payment on a house.
Reason 2: You may not have clearly defined goals.
Trying to retire without knowing how much to save is like starting a race without a finish line. How far can you run before you realize you need an end goal? If you say, “I’d like to save $2 million and retire by the age of 60,” you now have a goal that you can work toward. You can easily pull out a retirement calculator and plug in some numbers. “If you save X dollars of money over 30 years, X dollars will be saved by age 60 if you save X dollars per month.” Of course, you can get a robo advisor or a financial advisor to do all the fancy calculations for you.
However, if you screw up, and don’t put money into your 401(k) or start and stop a Roth IRA dozens of times, these are good signs that you don’t have a clearly defined end goal.
Setting an end goal and working towards it gradually can make you feel very good Because you know what you’re working towards. It can be really hard to set these goals, especially knowing how much you should save for retirement, so seek advice from a professional. (Quick tip: Many experts recommend saving at least 10 times your current salary by age 67.)
Reason 3: You are not saving enough.
Despite the salary increase, you may not allocate enough for a defined contribution retirement plan or other long-term savings method for retirement.
you’re not the only one. Those with a 401(k) at work may struggle to maintain their standard of living in retirement at a rate of 48%, according to a 2019 report from the Center for Retirement Research at Boston College.
A study by the Employee Benefits Research Institute found that consistency is key. Calculations of 1.9 million 401(k) participants from 2010 to 2018 showed that their balances rose from $63,756 to $180,251 on average over those eight years. Changes in 401(k) plan account balances reflect contributions from both employers and participants and investment returns, among other factors.
The only way to combat this problem? Go back to the goals you’ve set and determine how much you’ll need to contribute to your retirement plan each month to meet those goals.
Reason 4: You are not benefiting from maximum contributions or catching up.
If you’ve had a few years of foreplay (we all do at some point!), don’t feel bad – just take action!
You can make a maximum deferral of $19,500 to your 401(k) in 2021 with a compensation contribution of $6,500 allowed if you are age 50 or older. You and your employer can make a maximum contribution of $58,000 in your 401(k), with a maximum of $64,500 with a compensation contribution.
For tax year 2022, your 401(k) contribution limits are likely to change, so stay tuned. Contribution limits have been on the rise since the introduction of the 401(k), except for two years when the limits had to be corrected to simplify and encourage the use of a second 401(k).
What about Individual Retirement Accounts (IRAs)? If you contribute to an IRA or a Roth IRA, you can contribute $6,000. You can pay an additional $1,000 in a compensatory contribution to an IRA in 2021 if you are 50 or older. This means that you can increase your IRA contribution up to $7,000.
Adding as many of the types of accounts you choose to invest in for retirement as possible can make a big difference in the long run.
Also, take advantage of employer matching contributions – you give away free money when you ignore it.
Reason 5: You have debts.
Your debt may prevent you from making real financial progress, because all of your extra money goes toward paying off credit card balances rather than paying it into your retirement fund.
Total household debt stocks rose $313 billion in the second quarter of 2021, according to the quarterly report on household debt and credit. This shows a 2.1% increase from the first quarter of 2021 to a total of $14.96 trillion.
Debt does not allow you to pre-empt your money and certainly does not help you focus on your long-term financial success. Work to pay off your debts and stay out of debt so you can focus on your goals.
Guarantee your long-term success
Don’t pressure to raise or upgrade to secure your financial future. She can’t handle it! You have to take care of other external factors first.
Finally, define your own definition of long-term success. What does that mean to you? It shouldn’t look like your neighbor’s success or your brother-in-law or anyone else – it should look like your own.
At the very least, consider what you could do better than last year – increase your retirement contribution 5% more, pay off your top credit card balance, etc. Your increase or upgrade is just one small tool in your arsenal to get there.