A 5.5% cost of living increase in 2022 and now an 8.7% increase in 2023? That’s a significant bump for state of Missouri employees over the last two years and its one you should feel great about! That being said, it’s important you plan how you’re going to spend that extra money because as ridiculous as this may sound, a raise can actually increase the likelihood of you falling short of the income you need for retirement.1 People across the board often do not increase their retirement savings contribution when they receive a pay raise. That’s problem number one. Problem number two is that larger paychecks make us feel wealthier and more empowered to buy things…like a nicer car, more home décor, new clothes, an extra dinner or lunch out, and so on. Each of those purchases, whether large or small, attribute to the “lifestyle creep,” meaning your expectation of how you live increases. However, if you’re not increasing your retirement savings at the same rate, you may have a hard time affording that same lifestyle on a fixed income in retirement. So, what’s the solution? Spend part of your raise and save the rest. Saving an additional 1% can make a huge impact on your end retirement savings balance. Here’s an example. Let’s say you’re making a salary of $35,000, if you contributed 4% throughout a 25-year career with the state, assuming a 6% annual return and 1.5% annual salary increases, your balance at retirement would be roughly $90,789. However, if your salary was $38,045 – - exactly 8.7% higher - like the pay raise you’re about to receive – and your contribution rate was 5%, assuming the same assumptions as earlier, your balance after a 25-year career would be $123,360. Tack on another .1% annual automatic increase and your balance jumps to $147,507 at retirement! Those are huge boosts to your retirement savings balance by only making very minimal changes to your contribution. So, before you start spending your upcoming raise, be sure to log into your MO Deferred Comp account, increase your contributions and save part of your raise for your future retirement. I promise, you won’t miss it, and you’ll thank yourself at retirement for saving more for your future during your career.
