A savings plan is the cornerstone of a productive financial plan, but with so many strings pulling at your paycheck, how can you start a robust savings strategy? I have found that one of the easiest ways for academics to build a strong savings rate is through the “Match and Raise” strategy. This helps create a low bar foundation with specific and actionable steps to raise the savings rate without any added burden. Sound too good to be true? Not at all. Professors are in a unique position that (usually) provides a stable income with structured retirement plans. These plans and positions, while varied, typically have two major components:
- There is a retirement match
- Pay adjustments due to cost of living, merit, or promotion
Using these two components, we can build a savings plan that is simple and therefore easy to follow.
University Retirement Match
First, your retirement contribution should be at least at the match amount. If your university matches up to 5% of your salary, then you should be contributing at least 5% of your salary to retirement. Why? Because this is a guaranteed and immediate return on investment.
For ease, let’s assume a $100,000 salary. A 5% contribution of $5,000 would immediately be matched with $5,000 from the university. You just doubled your contribution for the small cost of the time it took to set up your contribution amount. The match level contribution should be a financial priority. After the match level is met, then the second stage of the strategy comes into play.
Most professors find themselves at the match level, usually due to the fact that universities have a default contribution level for all employees of the match amount or an automatic plan to get the employees to that level. Contributing over the match is where the difficulty lies especially if the default match contribution is far away from the commonly recommended 10-15% savings rate.
Academic Raises
For the “Raise” component of the strategy, you should plan to increase your retirement contribution by the same amount of any future raise. Since you are paying your bills on your current salary, your future living expenses should not increase by the same amount as the raise itself.
For a percentage raise, multiple the percent by your current salary and then divide by your post raise salary for the additional retirement contribution. For a dollar amount raise, divide the dollar amount by your post raise salary to covert to percentage. Then increase your retirement contribution by this percentage to coincide with the start of the raise.
Example 1: You receive a $10,000 raise for your promotion from Assistant to Associate Professor. Assuming a $100,000 salary, your new salary will be $110,000. Using the Match and Raise strategy, this additional $10,000 will be converted to retirement contributions. You can increase your retirement contribution by $10,000 or 9.09% ($10,000 / $110,000).
Example 2: You receive a 2% cost of living adjustment to your salary of $100,000. Your new salary will be $102,000. You can increase your retirement contribution by $2,000 or 1.96% ($2,000 / $102,000) and still have your same $100,000 post retirement savins income each year. For smaller raises like this, you could easily round your contribution increase to 2%.
Depending on your university or college, these regular contribution increases and add up quickly and will create a more involved (and better) problem of maxing out your 403(b) or 457. In these cases you can start tackling other financial goals.
Over your career, you will gradually have increases in salary whether it is from cost of living adjustments, new jobs, raises, etc. Using the Match and Raise strategy helps you avoid lifestyle inflation. Instead of getting a bonus and naturally spending more to match the increased income, this strategy keeps the money from ever hitting your account. Your paycheck amounts remain the same, but your retirement contributions start stacking up. This is a simple and effective strategy to start taking control of your financial life and future.