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How to Turn A Measly Salary Raise into a Six-Figure Gain

While the cast of Jersey Shore is reportedly holding out for a 200 percent salary raise, those of us toiling away at more conventional jobs will be lucky to pocket a 3 percent or so raise this year and next. According to a Conference Board salary survey the median pay raise this year will be 2.5 percent, with a slight improvement to 3 percent eyed for 2011. If it makes you feel any better, that's still better than the flat pay for key White House staffers. Okay, I admit that's not much salary solace. So how about a strategy that can easily turn a measly salary raise into a six-figure gain?

The One-Percent Solution
This being the Retirement Beat, the idea is to simply reserve one percentage point of every raise for your retirement savings. Make that commitment and over time there's a pretty decent chance you'll boost your retirement savings by more than six figures.

Over at The New York Times website is a terrific retirement calculator that shows the payoff from saving just one percentage point more a year. Someone earning $150,000 with a current 401(k) balance of $250,000 could generate an extra $375,000 over a 20-year stretch:

Note: The illustration above assumed a current deferral rate of 10 percent of salary and plugged in a 3 percent annual salary increase and a 6 percent annualized investment gain. Noodle around for yourself to see how adding one percent a year to your savings rate can generate big gains down the line. And just fyi, the Times' calculator imposes a maximum salary deferral limit of 16 percent.

Make Auto-Escalation a Raise Ritual
In a more perfect 401(k)-world all participants would be opted-in to an auto-escalation system in which the plan would periodically boost your contribution rate by one percentage point But so far, most plans don't offer this, and those that do tend to put it into action only for new employees.

So the idea here is to create your own auto-escalation policy. The minute you get a raise, contact HR and increase the percentage of your salary that you contribute to the 401(k). For example, if you currently defer 5 percent of pay, when you get your next raise boost your contribution rate to 6 percent. When the next raise rolls in, boost your contribution rate to 7 percent. And keep going. As a general guideline, saving 15 percent of salary is a recommended target for ensuring a comfortable retirement. Do it before the money ever shows up in your paycheck and you eliminate the need to "adjust" to living on less.

If you butt up against the 401(k) annual max contribution limit of $16,500 this year (if you are at least 50 years old you can contribute a max of $22,000) you can still keep saving more by maxing out on an IRA and/or setting aside money in a straightforward taxable account. Make it a habit to save just one percentage point more and you can turn even a measly raise into a major asset.

More MoneyWatch articles:
Salaries Stagnating at White House
How To Get a Raise in a Recession

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