Transform a 3% Increase in Salary into Over $171,000 by Retirement: A Guide
Transform a 3% Increase in Salary into Over $171,000 by Retirement: A Guide
New Year's resolutions often involve self-improvement, but for some, it's also a period when employers dish out salary increases. With a fresh budget, many companies find it easier to cough up those raises.
If fortune smiles upon you in 2025, your raise could be the perfect catalyst for your New Year's resolution to save more. Here's a strategy to turn a 3% raise into over $171,000 by retirement.
The average raise hovers around 3%
Every employer sets their own rules regarding raises. Generally, the increase you receive is a percentage of your current income. A 3% raise is the norm, according to Indeed.
However, the value of this raise depends heavily on your annual salary. The typical full-time worker earned $1,165 per week in the third quarter of 2024, as reported by the Bureau of Labor Statistics. That translates to a yearly income of $60,580.
A 3% raise on this sum amounts to an additional $1,817 per year. It's a great boost that could enhance your lifestyle or help you achieve long-term goals. But if you don't need it immediately, you can turn it into much more.
Investing can amplify the worth of your raise
Investment is the key to increasing your purchasing power over the long term. You have to part with some cash temporarily, but the returns later are significantly higher than your initial investment.
Let's say you decide to invest the $1,817 raise discussed earlier. That's approximately $151 per month. If you invest this amount monthly and achieve a 7% average annual return, you'll have around $171,163 in your account after 30 years, despite only contributing $54,360 personally.
This calculation doesn't account for future raises you might save, superior investment returns, or additional funds you could receive due to saving for retirement from your employer. So, you could potentially end up with a lot more than this figure.
Suppose your employer offers a 3% dollar-for-dollar 401(k) match. Now, your monthly retirement contributions would rise to $303 due to the match. Combined, your personal contributions and 401(k) match would amount to $343,460 after 30 years, given a 7% average annual return. Surprisingly, your total personal contribution would still be the same $54,360 from our initial example.
Not feeling the urge to save your entire raise
Saving your entire raise might not appeal to everyone. The thought of enjoying the fruits of your labor now is entirely understandable. However, it doesn't have to be an either/or situation. You can compromise by alloting half your raise for spending today and investing the other half, or any combination that suits you best.
It's advisable to determine upfront how much of your raise you plan to save, rather than hoping to save whatever is left over at the end of the month. The danger of lifestyle inflation (spending more as your income increases) is real, and you may end up spending your entire raise if you don't specifically allocate a portion for savings.
If you manage to save and invest your entire 3% raise each year, you could accumulate over $171,000 by retirement. By investing your raise, you can leverage the power of compound interest, significantly amplifying its worth. Alternatively, if you wish to enjoy your raise now, consider allocating half for spending and saving the other half or a proportion that suits you for retirement savings.