Tuesday, March 26, 2024

How Much Should I Pay Into My 401k

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The Contribution Limit For 2022

How Much Should I Have In My 401k?

Pretty much all retirement accounts ‘s, IRA’s, 403’s, etc.) have specific contribution limits that change almost every year due to cost of living adjustments. A lower contribution limit can feel like there’s a little less leg work to be done to max out the account.

According to the IRS, you can contribute up to $20,500 to your 401 for 2022. By comparison, the contribution limit for 2021 was $19,500. This number only accounts for the amount you defer from your paycheck your employer matching contributions don’t count toward this limit.

Some companies provide a dollar-for-dollar match on your 401 contributions, up to a certain percentage of your total salary, usually between 3% and 7% . So let’s say you contribute 7% of every paycheck to your 401, which works out to be $200 per paycheck. If your company matches your contributions dollar-for-dollar up to 7%, that means your employer is giving you an additional $200 per paycheck into your 401. If you get paid twice per month, that works out to be a total 401 contribution of $800 per month, or $9,600 per year.

In this scenario, you can still contribute beyond 7% of your paycheck, but anything beyond 7% will not be matched by your employer. You’ll need to double check with your HR department if you aren’t sure how much of a match your company provides.

Increase 401 Contributions Over Time

Even if you can’t maximize your contributions at the start, ask your employer to increase the percentage of your paycheck that gets contributed each year. “Most retirement administrators have automated programs where an individual can elect to increase the percentages of their contributions on an annual basis,” according to Hedstrom. “More than likely the 1 or 2 percent annual increases are inconsequential to you now, but they pay off immensely in the long run.”

Please click here to use Quicken’s, free 401k Retirement Calculator.

What To Do If You Exceed The 401 Limit

If you’re planning to put away more than the $19,000 401 limit, you’ll need to find additional ways to invest your money. Here are three steps to follow to get the most out of your investment dollars.

1. Figure out which retirement savings account makes the most sense for you

First, determine which tax-advantaged retirement savings accounts are the best options for you, depending on your income and tax status, Nick Holeman, a certified financial planner and senior financial planner at Betterment, tells CNBC Make It. These can include a 401, Roth IRA, traditional IRA and/or a health savings account.

Traditional 401 plans, for example, offer tax savings up front, while Roth-style accounts offer tax-free withdrawals in retirement. Here’s a breakdown of how different types of plans work.

2. Max out your retirement accounts

Once you’ve determined the best account for you, contribute as much as you can to it. “Most people should start with their 401 if there’s a match,” Holeman says. But, “if your 401 has really high fees or really bad investment options, you might be better off starting with a traditional or Roth IRA and then going to your 401 after you’ve maxed that out.”

Once you’ve maxed that out, “waterfall your way down” through other tax-advantaged accounts, Holeman says. “Figure out how much you need to save, then rank the accounts from best to worst and fill up the buckets as you go until you’re unable to save anymore.”

3. Branch out to other investments

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It Never Hurts To Save More

Twenty percent is a great goal, but some retirement experts actually suggest saving more like 25% or even 30. Why?

You know that saying, Past returns are no guarantee of future performance? Thats why. Its true that the annual average return of the S& P 500 between 1928 and 2014 was 10%. But that doesnt mean well get that average return over the next 86 years.

Jack Bogle, the father of index funds and founder of Vanguard, says that investors should plan on lower returns in the coming decade and other commenters suggest lower yields even beyond that.

We have no way of knowing what future returns will bethey could be 8%, they could be 4%. But the only way to hedge against an uncertain future is to save more money. The more you have, the less you need jaw-dropping returns to meet your goals.

Is Your 401k Savings On Track

How Much Should I Contribute to My 401k?  Abandoned Cubicle

Have you met your mark? If you arent there yet, dont panic. These are just rules of thumb. That means they only give you a rough estimate of what you should ideally have by the time you hit these ages. They do not take into account your individual income and experiences or other investments you might have in play.

In reality, theres no one hard answer to how much you should have in your 401k and anyone who tells you otherwise is either lying to you or just doesnt know much about finance. We could pull up a bunch of figures and show you how much someone in their 20s or 30s is saving but that would be a complete waste of time for two reasons:

1. Its impossible to compare two investors fairly. Everyone has their own unique savings situation. Thats why itd just be dumb to compare the Ph.D. student saddled with thousands in student loan debt with the trust fund baby who just snagged a cushy six-figure corporate gig the first month out of college. Theyre both going to save very differently, so its not worth comparing.

2. Most people arent financially prepared for retirement. The American Institute of CPAs recently released a study that found that nearly half of all Americans arent sure if theyll be able to afford retirement. Thats even scarier when you consider the fact that many people underestimate how much theyll need for a comfortable retirement.

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When Determining Your Contribution Percentage Consider Automatic Boosts

In 2021, the average employee contribution to a Vanguard 401 plan was 7.3 percent of pay, according to Vanguard 401 data. Meanwhile, only 23 percent of 401 participants saved more than 10 percent of their salary for retirement in 2021.

If you cant afford to contribute that much initially, many employers will allow you to increase your contribution percentage automatically each year , which may be a more comfortable and gradual way to increase your contribution amount.

A 401 can be one of your best tools for creating a secure retirement. But you may want to also consider some retirement investing alternatives.

Contribute As Much As You Can

You have emergency savings. You met your employers 401 match and then you maxed out a Roth IRA . Then what? How much should you really contribute to your 401 now?

Your goal at this point should be to save as much as you can for retirement while still living comfortably now. For some people, that will mean another 1% of their salary into their 401. For others it will mean maxing out their 401.

The key is to put as much as you can toward retirement. Some people spend their money frivolously and save only a little bit. If youre spending thousands of dollars every month on unnecessary purchases, you should find a way to cut that spending and put it toward retirement instead. It might not sound fun, but remember that the goal is to have financial security when you retire.

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Think Of Medical Needs Later In Life

Annette Hammortree, CLTC, RICP, and Owner of Hammortree Financial Services

When taking a look at your employers retirement plan, I suggest that you start by contributing 15 percent of your income. The 401 specifically should be for at least the full matching contributions offered by your employer. The next step depends on your goals and objectives.

Once you have committed to matching the 401 contribution, the next step would be to utilize a Health Savings Account, since you can tap into this for medical needs during retirement, as well as starting a Roth IRA. The Roth is important since it provides another bucket to generate income during retirement. The power is in the rate of savings not the rate of return.

I also recommend taking a bucketing approach for different savings objectives, short , intermediate , long term and retirement.

If You Start At Age 2:

Ramit Sethi: How Much Should I Have In My 401(k)?

With a 4% rate of return: $1,264.86 per month

  • Annual salary needed if you save 10% of your income: $151,783
  • Annual salary needed if you save 15% of your income: $101,194

With a 6% rate of return: $753.20 per month

  • Annual salary needed if you save 10% of your income: $90,385
  • Annual salary needed if you save 15% of your income: $60,259

With an 8% rate of return: $429.68 per month

  • Annual salary needed if you save 10% of your income: $51,561
  • Annual salary needed if you save 15% of your income: $34,376

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If You Start At Age :

With a 4% rate of return: $1,641.62 per month

  • Annual salary needed if you save 10% of your income: $196,995
  • Annual salary needed if you save 15% of your income: $131,336

With a 6% rate of return: $1,052.85 per month

  • Annual salary needed if you save 10% of your income: $126,341
  • Annual salary needed if you save 15% of your income: $84,231

With an 8% rate of return: $653.91 per month

  • Annual salary needed if you save 10% of your income: $78,470
  • Annual salary needed if you save 15% of your income: $52,316

How Much Should I Contribute To My 401k

Using your company’s 401 plan to save for retirement lets you stash away money that grows tax-free as long as it stays in the account. However, with such large annual limits — $17,500 if you’re under 50 and $23,000 if you’re 50 or older as of 2013 — it’s challenging to figure out the “right” amount to contribute each year. “As with any sound financial planning advice, it depends upon the individual’s situation,” says Anika Hedstrom, an MBA and Senior Financial Analyst practicing in Southern Oregon.

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Next Steps To Figuring Out How Much To Put In Your 401

If youre unsure about how much you can afford to contribute to your 401, check out our paycheck impact tool that can help you calculate an exact number based off your salary and employer match options. If your employer doesnt offer a 401 matching plan, dont fret. There are still many ways you can save for retirement.

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Heres The Bottom Line

How Much Should I Contribute to My 401k?  Abandoned Cubicle

I went through a lot of tedious math in this post, so I apologize if your eyes glazed over. But heres all you need to know. First, always contribute as much to your qualified retirement as you can, because every dollar in taxes you save by doing so is like getting an interest-free loan. Second, always, always, always contribute enough to get the maximum amount of free money your employer is offering.

Also Check: How To Pull From Your 401k

Start Living On A Budget And Tracking Your Expenses

The fact is that until you know where your money is going each month youre going to have a hard time finding money to set aside for retirement savings.

The reason its so important to discover and track where your money is going each month is so that you can identify wasteful spending and reroute it toward causes that are more important to you.

Many people find when they start tracking expenses that they are spending money in $5, $10 and $20 increments that seems like its not a lot but adds up to hundreds or thousands of dollars each month.

When my family started tracking expenses in 2013, we were able to cut them down by nearly $1,000 a month and we were making well under $100,000 per year at the time.

By trimming grocery expenses, cutting back on entertainment costs and being more mindful of each purchase, we found a lot of waste in our spending. We were able to use what we were wasting for much more important things, such as paying off our debt.

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Talk To An Advisor If Youre Unsure

Mr. SR, Founder of Semi-Retire Plan

Consider what your goals for your future are. I encourage readers to plan the retirement of their dreams, decide how much money the will need to fund that dream, then calculate a savings rate to achieve that portfolio value.

But, depending on your income level now versus what you expect your income to be in retirement, you may want to consider a Roth option like a Roth IRA or a Roth 401. I recommend speaking with a financial advisor for personalized advice. Many companies actually offer free periodic financial advising from their 401 provider, so that could be a good option to start with.

3 quick takeaways

So, what are a few common themes we can extract from our 10 experts?

  • First and foremost, establish a budget that takes into account your short and long-term financial commitments. If budgeting isnt your strongest trait, check out our guide to making a budget for smarter spending.
  • Next, consider contributing as much as you feasibly can, especially if youre early on in your career. Youll have a general dollar amount of how much you can contribute to your plan after you establish a budget.
  • Finally, take into account employer matching if the company you work for provides it. As mentioned numerous times throughout the article, employer matching is essentially free money you can take advantage of.

Covering Your Bases Through Tax Diversification

Should you save into your 401k or pay off your debt?

If you’re not sure where your tax rate, income, and spending will be in retirement, one strategy might be to contribute to both a Roth 401 and a traditional 401. The combination will provide you with both taxable and tax-free withdrawal options. As a retired individual or married couple with both Roth 401 and traditional 401 accounts, you could determine which account to tap based on your tax situation.

“You can’t really know what future tax rates will look like, so building in the flexibility to use multiple accounts to manage taxes is important and helpful,” says Rob.

For example, you could take RMDs from your traditional account and withdraw what you need beyond that amount from the Roth account, tax-free. That would mean you could withdraw a large chunk of money from a Roth 401 one yearsay, to pay for a dream vacationwithout having to worry about taking a big tax hit.

Besides the added flexibility of being able to manage your marginal income tax bracket, reducing your taxable income in retirement may be advantageous for a number of reasons, including lowering the amount you pay in Medicare premiums, paring down the tax rate on your Social Security benefits, and maximizing the availability of other income-based deductions. Be sure to weigh all your available options to maintain your retirement goals.

1Individuals must have the Roth 401 account established for five years and be over the age of 59½ for tax-free withdrawals.

5The Tax Foundation, 3/22/2017.

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Could You Increase Your 401 Contribution

How often you can adjust your 401 or 403 contribution is generally determined by your employer and your retirement planit may be once a year or as often as youd like.

If youre able, reducing non-essentials or allocating new income could allow you to bump up the amount youre saving.

A 1% increase only makes a small difference in your paycheckbut may make a big difference down the road. Consider the example below for a $35,000 annual income:1

Additional contribution

1 This example is for illustrative purposes only. It assumes $35,000 in annual income, 3.5% annual wage growth, 30 years to retirement, 7% annual rate of return and a 25% tax bracket. Estimated monthly retirement income calculations assume a 4.5% annual withdrawal in retirement. The assumed rate of return is hypothetical and does not guarantee any future returns nor represent the return of any particular investment option. Reduced take-home pay is accurate for the initial year and would change based on participants annual pay. Estimated savings amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary.

2 Contributions are limited to the lesser of the annual plan or the IRS limit as indexed annually.

3 Some plans may not allow catch-up contributions to the plan.

This document is intended to be educational in nature and is not intended to be taken as a recommendation.

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