We all know a good math teacher who would most definitely agree with this!
When it comes to saving for retirement in a salary reduction plan and making a recurring contribution from your paycheck, you have two choices. You can either select a set dollar amount or you can select a percentage of pay.
While it may not be obvious at first, making a consistent contribution using a percentage of pay is the better way to go.
When you or your employees select a dollar amount, that dollar amount is fixed and will not change as pay increases, unless you pro-actively increase that dollar amount. Therefore, your retirement contribution does not grow proportionately as your salary increases.
On the other hand, when you or your employees pick a percentage, that percentage is associated with total pay so the associated dollar amount incrementally increases each and every time you get a raise. Therefore, your contribution to your retirement saving grows in proportion to your salary when using a percent.
Here is a hypothetical example illustrating the benefits of using percent of pay when it comes to making recurring salary reduction contributions to your retirement plan.
Example comparing recurring dollar contributions to recurring percent contributions
As you can see, using a recurring percentage for contributions is more beneficial over time. Better yet, you could also benefit from higher compounding interest, which is not depicted in this example.
All said and done, the way to BEAT THE BUCK is to use PERCENTAGE when completing a Salary Reduction Agreement or when faced with the decision to use PERCENT or DOLLAR for recurring contributions.
TC127843(0722)3
