Saving for Retirement Takes Commitment. "Marry" Your 401(k).

As a company CFO, I routinely speak with our staff -- most of whom are in their 20s and 30s -- about the need to plan for their retirements and to get started with an aggressive savings plan NOW. I gave such a talk today, Valentine's Day, 2014. In keeping with the theme of love and commitment, I came up with the idea of treating your 401(k) like a life partner; i.e., whatever you make, think about sharing it 50/50 with your partner. Obviously, you can't share your entire salary with your 401(k). However, annual raises can be thought somewhat as being "found money," and if quickly shared on a 50/50 basis with the 401(k), the employee will simply moderate their lifestyle based on their remaining take-home pay, and they'll never miss what gets tucked away in the 401(k). Here's a scenario:

• Pat and Chris start their careers at the same time and at the same salary.
• They both get $5,000 raises following each of their first 5 years of work, followed by 4% annual raises thereafter.
• They both start their 401(k) contributions at 10% of their gross pay.
• Pat maintains his contributions throughout his career at 10% of his pay.
• Chris "marries" her 401(k) and splits all of her raises 50/50 with her 401(k) plan; i.e., whatever her raise, half of it goes to her 401(k).
• Chris hits the current annual contribution max of $17,500 in Year 6. She continues to contribute the max thereafter. [Take note: after 5 years of employment, both Chris and Pat have increased their salaries by $25,000. Stingy Pat has only given an extra $2,500 to his 401(k). Generous and loving Chris has shared her increase 50/50 to the tune of $12,500 with her 401(k).]
• We'll keep things simple and won't show Chris or Pat taking advantage of the additional catch-up contribution of $5,500/year when they reach 50.
• We'll assume the IRS authorizes 3% annual increases in the max during that time.
• We'll also assume a 7% investment return and a 40-year career. 

After 40 years of work, Chris ends up with roughly $4.3 million in her 401(k), almost double Pat's total. If she draws on that money at a rate of 4% of the ending investment balance, she'll be able to replace 61% of her ending pre-retirement salary, whereas Pat will only be able to replace 31% of his. Adding social security on top of Chris's draw, she'll probably be pretty comfortable in retirement. Pat, on the other hand, needs a part-time job in retirement.

Is this a gimmick? Maybe, but I'd rather think of it as being a rational method to enforce a savings discipline. Retirement doesn't fund itself, and few people have pensions any longer. So, if it takes a gimmick to help people reach financial security, I'm all for it. Here are the numbers (click to enlarge on a new page):