Chris O'Shea
A 401(k) plan is only as good as the money you contribute to it. That’s why, if your employer offers an auto-escalation plan, you should consider taking full advantage. Here’s what you should know about this savings-boosting tool.
The Basics
An auto-escalation of your 401(k) is exactly what it sounds like. Each year, your contributions automatically bump up according to the set percentage. That means if your employer sets the escalation at one percent, every year you’ll contribute one percent more of your salary to your 401(k) plan. It’s particularly helpful because many employers automatically enroll employees at a 3% contribution rate.
Why It Helps
Auto-escalation plans help boost your savings by putting your savings on autopilot. If you’re someone who takes a “set it and forget it” approach to things, auto-escalation is your best friend. It does the work for you. You don’t have to worry about paperwork or anything else: Just enroll in the auto-escalation plan and you’re done! You’ll incrementally grow your 401(k) each year without much more work on your part.
Other Considerations
An auto-escalation option for your 401(k) is great, just make sure you can afford the yearly increase. You should also consider your overall financial health before committing. Ask yourself the following:
- How much emergency savings do I have?
- How much debt am I dealing with?
- Should I address debt and emergency savings before signing up for the auto-escalation?
There is no right or wrong answer. That’s why it’s important to consider all your options before making a major financial move.
Do One Thing: Enroll in auto-escalation of your 401(k) as long as it makes financial sense. It’s an easy way to pad your retirement savings.
