Building a 401k can have major advantages over traditional IRAs when it comes to retirement savings. If you have recently started a new job and are planning to sign up for your company’s 401k plan, you might be contemplating how much to contribute. While the short answer is that you should contribute at least enough to get the full employer match, you will want to consider all aspects before making a decision. Learn more about 401k contributions and how financial consultants can provide assistance.
Match Your Employer’s Contributions
Why throw away free money? If the company you work for offers employer match contributions, take them up on the offer. Determine how much you will need to save to qualify for a 401k match from your employer. While this can differ from company to company, most 401ks match 50 cents for every dollar contributed. There is typically a maximum match amount which is usually up to a maximum of 6 percent of pay. This means that an employee would need to contribute at least 6 percent of their salary to a 401k account to receive the maximum 401k employer match.
Do Not Exceed Contribution Limits
Employees are free to make contributions into their 401k accounts up to a certain limit. In 2018, the limit has raised to $18,500 if you are age 49 or younger, or up to $24,500 if you are age 50 or older. Any contributions made by employers top this limit. If you accidentally go over this annual contribution limit, you will be taxed twice which you should try to avoid. While this limit does dictate how much you can contribute within a year’s time, it does not tell you how much you should contribute. To determine this number, you will need to consider how much money you will need during retirement.
Consider Your Current Age
If you are in your 20s and are just starting to save for retirement, you can grow an impressive sum by the time you hit retirement just by contributing small amounts consistently. However, if you are in your 40s and are just starting your savings journey, you will need to save considerably more to achieve the same result. Of course, you can only save the amount that your budget allows. Many experts recommend saving at least 10 to 15 percent of your income for retirement, starting in your 20s.
Strive to Save at Least 10 Percent
While saving enough to match your employer’s contributions is an excellent start, you should not stop there. By saving even more, you can build up a satisfactory nest egg that will help carry you through your retirement. Unfortunately, research shows that the average 401k contribution was just 6.2 percent. However, this number rises to 10.9 percent once employer contributions are factored in. If your budget allows, strive to save at least 10 percent or more of your salary so you can feel confident about your finances when you finally retire.
Think About Your Long-Term Goals
Consider how much money you will actually need for retirement when setting your long-term goals. If you contributed the maximum amount each year starting in your 20s, you would likely have far more than you need when retirement arrives. Placing the maximum limit into your 401k account is also a major commitment that can be difficult to maintain year after year. When deciding how much to contribute, consider how you plan to retire, how much of your current income you would like to replace, and whether or not you want to rely on Social Security to supplement your retirement.
Increase 401k Contributions Over Time
It is not always possible to contribute a large percentage of your salary to a 401k when you are first starting out. Even if you are unable to maximize your contributions in your 20s, ask your employer to increase your percentage gradually each year. Even a 1 to 2 percent annual increase can have a big impact on your finances over time without making a noticeable difference to you now. Many employers work with automated programs that allow individuals to increase their 401k contributions automatically each year based on their preferences.
How Financial Consultants Can Help
Using a 401k plan to save for retirement is an effective and financially-savvy way to save money that grows tax-free until retirement. However, with a large maximum limit, it can be tough determining how much you should contribute to your account each year. Ideally, you want to sock away between 10 and 15 percent of your salary for retirement. However, you will need to look closely at your personal finances to see what amount works best for your family. For more information about 401k contributions or for assistance with your financial future, contact the financial consultants at IFG today.