It's the most exciting time of the year: When the IRS announces cost-of-living adjustments for retirement plan contributions. OK, it's not really that exciting, but it's important to keep an eye on your retirement savings. The big (well, not that big) change this year is that employees will be allowed to contribute an extra $500 toward their 401(k) accounts.
The IRS is raising the contribution limit for 401(k), 403(b), most 457 plans and the federal Thrift Savings Plan from $18,000 to $18,500. That's 2.7%. No, that's not that much. It's only a bit higher than the inflation rate (2.2%) and the increase in compensation over the past year (2.3%), according to the Bureau of Labor Statistics.
An extra $500 may not sound like much, but that "every dollar counts" stuff personal finance writers like me always feed you is actually true. Because, as a recent Time survey shows, most of us don't put away $18,000 a year to begin with. Most of us haven't put away $18,000 in our entire lives.
Here's another thing personal finance writers always talk about: The Power of Compound Interest.
Over the decades before retirement, an extra 2.7% saved each year can snowball as the interest compounds over and over.
If you don't have decades before retirement and your 401(k) savings aren't where you'd like them to be, the IRS allows people 50 and over another $6,000 in annual catch-up contributions on top of the $18,500 a year. This amount won't increase in 2018.
How to boost your retirement savings
Here's another personal finance cliche: Time in the market matters more than timing the market. The earlier and longer you're saving and investing, the better off you'll tend to be.
That said, you can increase your retirement haul with a few small changes. Saving for retirement is all about increments. A lot of financial experts will say to put away about 15% of your pay, but adding an extra 1%, or $500, or 2.7% will make a big difference because of how long you'll be saving. Try to put away a little more of your income each year if you can.
If your employer matches your retirement contributions, you should absolutely take advantage. Most companies match contributions of 3% to 6% of your paycheck. Do your best to meet that max contribution level, or you're essentially squandering free retirement money.
Yes, $500 may not be a huge increase, but remember all those cliches I spouted. It adds up.
Looking for more ways to automate and accelerate savings? We've got five ways to save 30% of your paycheck without really trying right here.