Paycheck Bumps and Tax Reform Present Crucial, Brief Savings Opportunity

Americans’ monthly paychecks have increased by more than $130 on average as a result of the implementation of the Tax Cuts and Jobs Act of 2017, experts noted during the second tax reform education webinar hosted by Broadridge.

As a result, Americans are naturally feeling more financially confident. Many say they are going to use the extra money to pay down debt faster, while others are going to use the money to save more for retirement.

Broadridge experts stressed that the window of opportunity to encourage people to actually direct their additional take-home dollars into retirement plans is in an important sense quite brief. This assertion is based on a well-explored principle of behavioral finance research: People feel much less pain and hesitation about saving money from their paycheck when it is redirected into a tax-qualified account before it is put into the wallet, digital or otherwise. On the other hand, it takes a very short amount of time for an individual to feel entitled to a given stream of income, leading to greater pain and hesitation around decisions to save that are framed as a privation.

As the Broadridge speakers warned, it will only take a few pay cycles for folks to get used to seeing this extra money come in. Thus the impetus is on advisers and sponsors to act today to directly encourage employees to consider putting some or all of their additional take-home pay into the retirement plan.

To help the effort, speakers noted that a seemingly modest $100 increase in monthly retirement plan contributions can have a huge impact on the ending amount of an individual’s savings accumulated and compounded over the course of a working lifetime. Even workers with shorter horizons before retirement may be surprised by the supportive power of compounding.