Getting a raise presents a fantastic opportunity to turbocharge your retirement savings.
Increase your 401(k) retirement contributions right when you get a raise
Congratulations! He is likely to get a raise this year. According to HR.com 2025-2026 Payroll Survey97% of employers plan to increase the compensation of their employees in 2025, with 78% of respondents planning to give average increases of 3 to 4 percent. Getting a raise presents a fantastic opportunity to turbocharge your retirement savings. While taking the extra cash and splurging on a new gadget or a fantastic vacation can be tempting, I would advocate for a more strategic approach, at least for part of the increase: immediately increase your retirement contributions. Timing an increase in your retirement contributions with a salary increase is a smart move that leverages the principles of behavioral economics to outsmart your brain and improve your long-term financial security.
Use the bias of loss aversion in your favor when you receive a pay rise
Loss aversion, a foundation of behavioral economics, posits that individuals experience the pain of a loss more intensely than the pleasure of an equivalent gain. Suppose you have to suddenly decrease your take home payment to increase retirement contributions before a pay increase. You need to reduce expenses in other areas, such as eating in restaurants, traveling or shopping to keep your budget balanced. You may feel the immediate “loss” of disposable income more acutely than the long-term “gain” of a more substantial retirement nest egg.
By tying the 401(k) contribution increase to when you receive a pay increase, you are effectively frame it such as “add” rather than “reduce”. This subtle change in perspective minimizes the perceived “loss” and makes the decision to save more psychologically easier to accept. In practice, it also means that you do not have to cut your spending in other categories, which is much more pleasant.
Resist the mental accounting bias of treating your pay raise as “earned” money.
Have you ever decided to treat yourself after receiving an unexpected birthday gift or tax refund? In these situations, many people choose to spend the extra money on something they wouldn’t normally buy, such as a new gadget or a trip. While we may normally be much more frugal with our monthly paychecks, we tend to see “found money” differently and therefore spend it differently as well. This is what economists describes such as mental accounting.
Mental accounting, a concept introduced by Nobel Prize-winning economist Richard Thaler, refers to the cognitive bias where individuals categorize and treat money differently based on its source or intended use. Mental accounting often leads people to spend windfalls, such as lottery or bonus winnings, on non-essential goods and experiences while treating regular income more conservatively. Understanding this bias is crucial to making more rational financial decisions, including what to do with a pay increase.
Thaler conducted experiments on this phenomenon, illustrating how this bias can occur in our daily lives. For example, imagine a scenario where you want to watch a movie. Buy a $10 ticket in advance and go to the theater. When you get to the theater, you realize that you lost the ticket (this experiment was done before smartphones, where you can easily pull the ticket on your phone). Thaler asked a group of participants if they would pay $10 to buy another movie ticket. 46% said they would buy another ticket.
In a second scenario, participants were asked to imagine going to a movie theater and realizing they had lost a $10 bill when they reached the ticket counter. Thaler asked this group if they would still pay $10 to buy a movie ticket. 88% of respondents said they would buy the ticket, almost double the first scenario.
As an article in Decision Lab he explains“In theory, we lost the same amount of money ($10) in both scenarios, because our answer should be the same for both questions. However, according to the mental accounting model, we tend to categorize our money in different budgets. In the first scenario, $10 has already been spent from our film budget, so spending an additional $10 on the film would make it seem incredibly expensive. In the second scenario, we attribute the loss $ 10 cash to a general spending budget instead, because we do not feel that the lost cash has affected our film budget despite the same loss of $ 10 As we can see, treating the same value of money differently based on to how we categorize this, we are more prone to make illogical financial decisions, such as irrational spending or poor investment decisions.
In the context of the salary increase, try to resist mentally categorizing your raise as “earned” money, which can increase the risk of overspending. Instead, think of your growth as a predictable increase in income and be intentional about its allocation. By consciously directing a portion of a raise toward retirement savings, you’re effectively insulating yourself from succumbing to this behavioral bias and putting your hard-earned money toward your long-term financial well-being.
Counter the Lifestyle Creep after a pay rise
One of the most insidious threats to personal finance is the “crep lifestyle.” As your income increases, you tend to increase spending to maintain a particular lifestyle. This can lead to a vicious cycle where higher earnings are quickly offset by increased expenses, leaving little room for additional savings.
Increasing your retirement contributions with each raise proactively combats lifestyle creep. You’re locking in a portion of your income growth for the future, ensuring that your savings rate keeps pace with your earnings. This disciplined approach prevents spending from spiraling out of control. It also allows your retirement nest egg to grow steadily over time and amplifies the power of compounding, which can add thousands to your net worth in retirement.
The bottom line for the pay rise
Increasing your retirement contributions with every raise is a smart strategy to significantly boost your financial future. By leveraging behavioral finance principles and process automation, you can declutter your brain, fight lifestyle creep, and ensure your retirement savings are on track to meet your long-term goals.