The 1% Retirement Savings Challenge: How To Save Slowly To Make Millions

Image by Getty Images; Illustration by Bankrate

Many people — more than half of working Americans — feel behind on retirement savings these days, according to a 2024 Bankrate survey, though about 27 percent have increased their contributions since 2023.

If you feel that you’re behind on retirement savings and have previously struggled to boost your IRA or 401(k) plan contributions, then the 1 percent challenge could be an easy way to get on track. And even if you’re doing well with retirement plan contributions, it’s a strategy worth trying.

How the 1 percent retirement savings challenge works

The premise behind the 1 percent retirement savings challenge is simple. All you need to do is increase your current IRA or 401(k) savings rate by 1 percent every year until you’re maxing out your contributions, or you’ve reached a point where you’re saving as much as you want to. It’s an easy way to build up to a higher savings rate over time without stressing your budget too heavily in the near term.

You may even be able to automate the annual increase through your 401(k) provider.

Here’s how the 1 percent retirement savings challenge might work. Let’s say you’re currently saving 3 percent of your salary for retirement in your company’s 401(k). If so, you’d boost your contributions to 4 percent next year, 5 percent the year after, and so forth.

If your goal is to max out your 401(k), you’d keep increasing your savings rate by 1 percent a year until you’ve hit the limit. If your goal is to save a certain percentage of your salary — say, 15 percent — you’d keep boosting your savings rate by 1 percent a year until you’re allocating that much money to your nest egg.

Benefits of the 1 percent retirement savings challenge

• It’s easy on your budget. If you boost your IRA or 401(k) contribution rate by a large amount at once — say, an additional 5 percent — you might have to seriously cut back on discretionary spending to compensate. Going with 1 percent higher each year is a more painless way to gradually boost your savings rate over time.

• It’s an easy increase to manage mentally. Going from saving 3 percent of your salary for retirement to 8 percent or 10 percent might seem overwhelming — so much so that you don’t do it. Going from 3 percent to 4 percent is a lot more palatable for many people.

• It allows you to benefit from compounding. By boosting your savings rate year after year, even by a small amount, you’re giving your money more time to benefit from compounded returns. Here’s how it works. If you invested $1,000 in the S&P 500 — which historically returns 10 percent annually on average — then contributed $100 a month for 40 years, your nest egg could top $576,000. Even without the extra contributions, that $1,000 could become $45,000 over 40 years.

Drawbacks of the 1 percent retirement savings challenge

• It may not be enough if you’re playing catch-up. Raising your IRA or 401(k) contribution rate by 1 percent a year may be just fine if you’re in your 20s or 30s with lots of time to finish funding your savings ahead of retirement. If you’re in your 50s and just getting started, you may need to boost your savings rate more aggressively year over year to end up with a decent-sized nest egg.

• It may leave you selling your savings short. If you’re contributing 3 percent of your pay to retirement savings now but can afford to raise that to 6 percent, the 1 percent retirement savings challenge could have you under-funding your IRA or 401(k) based on your personal financial situation. And ultimately, increasing your retirement savings rate by a larger percentage in the near term could lead to a larger balance in the long term.

• It may leave you short in other key savings areas. It’s a great thing to boost your IRA or 401(k) contribution rate by 1 percent. But if you don’t have an adequate emergency fund, for example, then it may be a better idea to allocate your extra money to your near-term savings over your long-term savings.

Alternatives to the 1 percent retirement savings challenge

While the 1 percent retirement savings challenge is an easy way to increase your IRA or 401(k) contributions, here are some alternative approaches to consider.

• Contribute enough to get the match. If you’re saving for retirement through a workplace plan and have an employer match, contribute enough to get the match or work toward reaching that benchmark. It’s a good place to start and not getting the match is essentially passing on “free” money. Once you reach the match, you can increase your contributions from there.

• Save your raise each year. If you can afford to, allocate your raise every year to your retirement savings. Got a 2 percent raise? Up your contributions by the same percentage. If it’s money you’re not used to getting, you may not miss it.

Bottom line

The 1 percent retirement savings challenge is a fairly painless way to grow your nest egg without having to change your spending too drastically. It’s worth trying if you’re looking for an easy way to give your IRA or 401(k) plan a boost without stressing yourself out too much in the process.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.