How to Invest Your 3% Salary Raise and Grow Your Retirement Fund
A 3% raise might not seem like much at first, but if you put it to good use, it can make a real difference in your long-term financial future. If you are wondering exactly how much a 3 percent raise is, let’s break it down.
According to the Bureau of Labor Statistics, full-time employees made around $1,165 per week in the third quarter of 2024. That works out to an annual salary of $60,580. A 3% raise on that is an extra $1,817 per year. While this may not sound life-changing, small increases like this, when used wisely, can add up over time. Instead of letting that extra money disappear into everyday expenses, you can use it to boost your retirement savings.
A financial advisor can help you use your year-end bonus to grow your retirement funds. This article also offers some useful tips on maximizing your raise for long-term retirement growth.
Table of Contents
Below are 5 ways to invest your 3% raise to boost your retirement savings:
1. Use the raise to maximize your 401k contributions
Most people have a 401(k) through their employer, but not everyone takes full advantage of it. Contributing more towards your account, especially when you get a salary increase, can make a big difference in your retirement savings over time. The Internal Revenue Service (IRS) has increased the annual 401(k) contribution limit to $23,500 for 2025, up from $23,000. Employees aged 50 and older can still make an additional $7,500 in catch-up contributions, bringing their total contribution limit to $31,000. However, there is an even higher catch-up contribution for those aged 60 to 63. Thanks to a change under SECURE 2.0, employees in this age group can contribute an extra $11,250 instead of the usual $7,500, giving them a total contribution limit of $34,750 for 2025.
Not everyone maxes out their 401(k) but using your 3% raise to increase contributions can be a smart move if your budget allows. Even if you cannot hit the maximum limit, increasing your contribution percentage can accelerate your retirement savings. A higher contribution not only boosts your nest egg but also lowers your taxable income and reduces the amount you owe in taxes. Contributions to a traditional 401(k) are made pre-tax, which lowers your taxable income. So, you owe less in taxes each year while also saving for the future. If your employer offers a matching contribution, increasing your contribution allows you to capture more of that free money. Some companies allow employees to allocate part of their bonus directly into a 401(k). This can be an easy way to invest more without feeling the impact on your take-home pay. HR or payroll can confirm whether this option is available in your company or not. If your employer does not allow after-tax contributions from your bonus, you can consider setting aside the extra money and increasing next year’s contributions. Even though you may not be able to invest the money right away, this can still be a great strategy.
You can use a retirement calculator to have more clarity on where you stand with your current savings and boost your 401(k) contributions accordingly. You can also consult with a financial advisor. A financial advisor can help you allocate your year-end bonus strategically to maximize your 401(k) percent contribution.
2. Contribute to a Roth Individual Retirement Account (IRA)
If you are already maximizing your 401(k) contributions, a Roth IRA is another smart way to put your raise to work. Investing your 3 percent match in a 401k may be restrictive in some ways. A Roth IRA allows you to diversify your retirement savings while gaining more control over your investment choices. Unlike a 401(k), which is tied to your employer, an IRA is entirely yours. You get to choose where and how you invest without being limited by the options your employer provides. One major advantage of a Roth IRA is that it is not tied to your job. If you change employers, your Roth IRA stays with you. This eliminates the hassle of rolling over funds or worrying about money that is left behind in an old 401(k). Unlike traditional 401(k) contributions, which lower your taxable income now but require you to pay income tax on withdrawals in retirement, Roth IRA contributions are made with after-tax dollars. This ensures that your money grows tax-free, and your withdrawals in retirement are also exempt from tax.
For 2025, the annual contribution limit for IRAs is $7,000. If you are 50 or older, you can take advantage of the catch-up contribution of $1,000, allowing for a total contribution of $8,000. While this limit is significantly lower than a 401(k), it is easier to reach, which makes it a practical option for most people. Maxing out a 401(k) can be challenging, but reaching the IRA contribution limit is often more attainable. If your 3% raise gives you an extra $1,800 per year, putting some or all of that amount into a Roth IRA can help you get closer to the contribution cap.
While a Roth IRA does not come with an employer match like a 401(k), it does offer tax benefits and greater flexibility in your investment choices. Since withdrawals in retirement are tax-free, having a Roth IRA alongside a traditional 401(k) gives you the ability to control how you withdraw funds in retirement and potentially reduce your overall tax burden in the future.
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3. Use the raise to diversify your portfolio
Apart from contributing to your 401(k) and IRA, your 3% raise can also be used to strengthen your overall investment strategy. If you have not reviewed your portfolio recently, this is a great time to rebalance and make necessary adjustments to it. When your investments are concentrated in one type of asset, such as stocks or bonds, you take on more risk than necessary. If the market takes a downturn during this time, your portfolio could suffer significant losses. On the other hand, if your portfolio is too conservative, you might not be maximizing your earning potential. Diversification helps you strike the right balance between risk and reward across market conditions.
A salary increase typically happens at the start of the year, which makes it an ideal time to assess your investment allocations. If your portfolio leans too heavily toward conservative investments, you can consider allocating a portion of your raise to stocks, index funds, or equity mutual funds. On the other hand, if your stock allocation is already strong but your bond holdings are low, investing in bonds, Certificates of Deposit (CDs), or money market accounts can provide your portfolio with more stability. You can also explore alternative investments. If you already have a mix of stocks and bonds, you can use part of your raise to diversify further. Options like Real Estate Investment Trusts (REITs), international funds, or even cryptocurrencies can offer growth potential to your retirement portfolio.
As you invest your 3% raise, make sure to take the opportunity to reassess your portfolio’s composition. For example, suppose your stock holdings have performed well, and their allocation is higher than before. In that case, you can invest your raise toward bonds or other lower-risk assets to maintain the intended balance in your portfolio. Your asset allocation should not just be about balance. It should also align with your long-term retirement goals. Bonds, while stable, may not always keep up with inflation. Stocks, on the other hand, have historically outpaced inflation. Running your retirement numbers through a inflation calculator can give you a clearer picture of how much you will need in the future, based on which you can decide your preferred allocation.
4. Contribute to a Health Savings Account (HSA)
Healthcare costs in retirement can skyrocket, so it is essential to start preparing now. While Medicare provides coverage for many medical expenses, it does not cover everything. You would still need to pay for vision, dental, cosmetic, long-term care, etc., out of pocket. Hence, having additional savings specifically set aside for healthcare is essential to ensure comprehensive retirement planning. An HSA is a great tool to help you prepare for your retirement healthcare needs. It works similarly to an IRA. You invest your money and let it grow over time. The key advantage is that an HSA offers a triple tax benefit. The money you put into an HSA reduces your taxable income. Your investments grow without being taxed. And as long as you use the money for qualified medical expenses, you will not owe taxes when you withdraw funds.
While HSAs are designed for medical expenses, you are not mandated to use them only for that purpose. After age 65, you can withdraw money for non-medical expenses without a penalty. However, this money will be taxed like regular income, similar to a traditional 401k or IRA. Nevertheless, the account does not restrict users and allows you to use the money as you please. You also do not have to withdraw the money like a traditional 401(k), which has mandatory withdrawals. The money can be left in the account if you have no use for it, allowing it to grow over time. Moreover, you can invest your contributions in mutual funds, stocks, bonds, etc.
If you have a High-Deductible Health Plan (HDHP) that qualifies for an HSA, you can consider using your raise to open an HSA if you do not already have one. This can be a great way to get started with tax-advantaged healthcare savings. If you are already contributing, you can put a part of your raise into your HSA to get closer to the maximum contribution limit. If you have only been using your HSA as a savings account, you can also use your raise to look into investment options that can help your money grow over time.
For 2025, HSA contribution limits are set at $4,300 for individuals and $8,550 for families. Investors aged 55 and older can make an additional $1,000 catch-up contribution, bringing their limits to $5,300 for self-only coverage and $9,550 for family coverage.
5. Pay down your debt so you can focus on your retirement fund
Paying off debt might not seem like a direct way to grow your retirement savings, but in reality, it can set off a ripple effect that helps you build wealth in the long run. The sooner you eliminate your debt; the sooner you can shift your attention to growing your retirement fund. Debt comes with interest, and that interest adds up over time. If you have credit card debt or student loans with high interest rates, you could be paying a lot more than what you originally took on. If you are carrying debt, consider using your raise strategically to eliminate it. Prioritize paying off credit cards, mortgages, etc., which often have the highest interest rates. You can make extra payments each month to reduce the total interest you owe and shorten your repayment timeline. Paying only the minimum on your debts can stretch your loans for years. Using your raise to increase your monthly payments can help you get out of debt faster. Once your debts are paid off, you will have more disposable income that you can put toward your retirement accounts and investments.
However, you must understand that while paying down debt is important, you must never neglect your retirement savings entirely. If your employer offers a 401(k) match, make sure you are at least contributing enough to get the full match. A good approach is to strike a balance by allocating part of your raise to your debt repayments while still contributing to your retirement savings through the 401(k) and other options mentioned above. If you are wondering how to figure out a 3 percent raise to strike a balance between your debt and retirement savings, consulting a financial advisor can be helpful.
To conclude
A 3% raise every year might not seem like much at first, but when used wisely, it can add up to substantial wealth over time. On the flip side, if spent on short-term indulgences, it becomes a missed opportunity, costing you much more in the long run. Hence, be careful with how you use it and aim to strike the right balance between enjoying your present and supporting your long-term goals. If you are unsure about how to allocate your raise, you can consider using online retirement calculators to estimate future projections or consult a financial advisor for personalized guidance.
Use the free advisor match tool to get matched with seasoned financial advisors who can help maximize your raise for long-term retirement growth. Answer some simple questions about your financial needs and get matched with 2 to 3 advisors who can best fulfill your financial requirements.
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