The One Change You Should Make This Year During Open Enrollment

My wife picked up our daughter from pre-school yesterday and our curly-haired, three-year-old was more excited than usual. When my wife walked onto the playground, our daughter immediately reached into her pocket and held out the treasures she found that day: a rock, a cherry tomato, and a penny. None of this surprised us. In the springtime, all the children at her school helped plant vegetables in the garden, so she would pick a tomato any chance she could. She will eat handfuls if we let her. She’s also become a collector of sorts. She is a rock collector or, more specifically, an asphalt pebble collector. Most recently, she has been on high alert to find coins. She mostly finds pennies, but occasionally, she finds a dime. If we have change in our pockets at the end of the day, we also give that to her. She is always thrilled to get home and drop the coins into her “iggy bank” as she calls it. She drops the pennies in her big pig and gives it a good shake to hear the coins rattle together. She knows when it is full, she gets to take it to the bank. 

On our most recent visit to the bank, she excitedly ran up to the bank teller with her pig. As she handed it over the counter to the bank teller, we learned that they no longer have the coin counting machines. Because the bank teller was kind, she painstakingly sorted each coin as our daughter watched. After 15 minutes, we reached the grand total of $67. Our daughter left the bank proud of herself and wanted to do it again. So, she’s back to collecting her coins that she finds in parking lots, stores, and playgrounds. I started thinking about how this story could relate to all our finances. And I thought, “what if we all took the time to pay attention to seemingly small changes?” If we don’t pass up the pennies, would it make a big difference?

Each year, employers provide an open enrollment period for employees to review their benefit elections. My experience has been that upon reviewing their current benefit elections, most people figure that no changes are necessary. This article will illustrate the one benefit election change that you should make this year, which is seemingly small, but can have a significant impact on your future finances!

This year during open enrollment, increase your retirement plan contribution by 1% of your salary. This seems like a small change, but you might be surprised to find out the difference this can make by following the same strategy each year. Here is an illustration: Sue is 45 years old and single, making $100,000 annually, and paid every two weeks. She is currently contributing 5% of her salary into her 401k at work. She has a balance in her account of $200,000. If Sue increases her 401k contributions to 6% of her salary, her take-home pay will be reduced from $2604 to $2576 for a difference of $28 every two weeks. How does this contribution change the amount that Sue will have at age 65 when she is ready to retire?

The 1% change has increased Sue’s balance at retirement by over $60,000. This is assuming that Sue only increases her percentage contribution by 1% this year and then keeps it at 6% from now until retirement. But what would happen if Sue continues to increase her contribution rate by 1% each year for the next ten years? Her account balance at age 65 would increase by $390,000 compared to her original 5% contribution.

For individuals already contributing the maximum amount allowed by the IRS into their employer retirement plans, this strategy can also be used in a non-retirement investment account by increasing your monthly contribution each year. If you need assistance reviewing your employer benefits during open enrollment, please contact me.