Here is a video published by Canadian finance expert Preet Banerjee that discusses the impact a 5 per cent annual increase per year can have on your savings.
Annual Increase Transcript
How can small increases to your savings can make a big difference to your nest egg?
You’ve probably seen examples of how saving regularly can yield impressive results over time. For example, if you saved $100 per month into a portfolio earning 5 per cent per year starting at age 18 and until you turn 65, you would end up with around $225,000. But here’s a simple tip that can yield big results.
Increase your automatic contributions every new year
Let’s see what happened to our 18 year old’s retirement portfolio if they only increase their annual contribution by 5 per cent every January 1st. After saving $100 per month when they were 18, they would increase their savings by 5 per cent when they were 19. 5 per cent of $100 is simply $5, so their new contribution increases to $105 per month. In year 3 when they turned 20, they increase this again by 5 per cent. 5 per cent of $105 is $5.25, adding this to $105 gives us a new monthly contribution a $110.25.
If they were able to continue with the annual contributions their nest egg at age 65 would increase from around $225,000 to just over $550,000. Now, annual 5 per cent increases are painless at the beginning but can become a bit more substantial after 40 years. The take-home message is that you may want to consider increasing your savings rate whenever you can buy as much as you can, and the beginning of every new year is a great time to do just that. Your nest egg will thank you later.