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How Much Should I Contribute to 401(k)?

While you may currently be bogged down with bills and debt, it's still smart to think ahead and plan for how you'll get by during retirement. The sooner you start saving for your golden years, the more your money can grow over time.

One way to do this is by utilizing a 401(k), a tax-advantaged retirement account offered by some employers as an optional employee benefit. If you participate in a 401(k) plan, a designated percent of your paycheck is deposited in your account pre-tax, and it grows tax-deferred, meaning you don't pay taxes on it until you withdraw it for retirement. It also reduces your amount of taxable income.

Many employers offer 401(k) matches as an incentive, which helps your savings grow even faster. But how much should you be setting aside each paycheck? To figure out how much you should be contributing to your 401(k), you'll need to consider how close you are to retirement, how much you can afford to set aside, and more.

How Much Should You Be Putting in Your 401(k)?

In short, this depends on your situation. If you're getting close to retirement and your savings isn't up to snuff, you might want to max out your 401(k) contributions (more on that below). A general rule of thumb by financial experts is to put 10% to 15% of your pre-tax income into your 401(k). But if you're 40 or older, consider setting aside 20%.

If you're younger and have decades to save, you might be fine contributing slightly less, especially if you can up your contributions over time. Here are a few other things to consider as you think about how much to set aside:

  • Do your family members have long lifespans? If many of your relatives live well into their 80s or 90s, you might need to save more than the average person.
  • Do you expect other sources of income in retirement, such as investment dividends or a pension? If you will be getting money from these and other investments, you won't need to set aside quite as much in your 401(k) account. As of now, you can also expect to collect Social Security starting at age 67. That number could change, however, and with the Social Security Board of Trustees projecting it will only be able to pay out 75% of scheduled benefits by 2035, you should concentrate on other avenues for the bulk of your retirement savings.
  • How do you expect your expenses in retirement to compare with your expenses now? If you think you'll live on significantly less, you might not need to set aside as much. But if you envision yourself living a cush life in retirement, you might want to contribute a higher amount to your 401(k). Also keep in mind that while you may plan to have a simpler lifestyle in retirement, other factors could play a part in your expenses, such as rising health care costs or a desire to travel to see family.

How to Get the Most out of Your 401(k)

While you can just set up your 401(k) account with your employer's default settings, you might be missing out on valuable opportunities to increase your retirement savings. Here are a few ways to maximize your 401(k) plan and increase the amount of money in your retirement account.

  • Take advantage of an employer match. Many employers offer 401(k) matches that incentivize you to save by essentially giving you free money if you contribute a certain amount. Try to contribute enough to your 401(k) to get the full match. If your employer matches up to 3% of your pre-tax income, for example, make sure you put in 3%. That means you'll actually get 6% of your income for your retirement, doubling the amount of money going into your 401(k).
  • Boost your contribution when you get a raise. Every time you get a raise at your job, increase the amount you contribute to your 401(k) since you won't feel the money coming out of your budget. Even if it's only 1% more of your salary, it can make a big difference over time.
  • Max it out. Because of its tax benefits, there are limits to how much you can put into a 401(k) account each year. As of 2019, the IRS permits employees under age 50 to contribute up to $19,000 to their 401(k) annually. Employees over 50 are allowed an additional "catch-up" contribution amount of $6,000 per year to help, well, catch up on retirement savings if they're behind. The more you can set aside, the better, due to the tax benefits—so try to contribute as much as you can within the limits.
  • Get out of debt. It's hard to set aside money every paycheck for retirement if you're currently bogged down with student loan debt, credit card debt or any other financial burdens. Work to reduce your debt burden so you have more income available for retirement savings. That said, be sure you're always contributing something to your 401(k).
  • Save to avoid a 401(k) loan or withdrawal. While you can pull from your 401(k) before retirement in the case of an emergency, you could pay steep financial penalties for doing so, and you'll lose your tax-advantaged retirement savings. Create an emergency fund to give yourself a savings buffer so you don't have to pull from your 401(k) when a disaster strikes.

What to Do if You've Maxed Out Your 401(k) Plan

So you've put the maximum amount of money in your 401(k) account for the year. Good for you! If you want to save even more for retirement, you have a few other options.

  • Open an IRA. You can open an Individual Retirement Account on your own with a brokerage. An IRA is another type of tax-advantaged retirement account, and it's not connected to an employer. They come in two main types: a Roth IRA, in which you contribute post-tax income and withdraw it tax-free later, or a traditional IRA, in which you contribute pre-tax income and pay taxes when you take it out at retirement. However, keep in mind that there are income limits for opening a Roth IRA, so not everyone is eligible. Talk to an accountant to find out which tax strategy makes the most sense for you.
  • Make other investments. There's no limit to how much you can invest if you open a general brokerage account and purchase individual stocks, bonds and mutual funds. If you're not sure how to invest strategically, consider hiring an investment advisor who can help you choose investments or manage them for you. If you're a conservative investor, you could invest in CDs, which have a low but guaranteed return. While these types of investments aren't tax-advantaged in regard to retirement, they may provide more cash for retirement—and you won't have to pay penalties if you need to access the money before then.

Sacrifice Now for Less Stress Later

It can feel like a drag to set aside a chunk of every paycheck for retirement, especially if it's a long way away and you have other financial goals, such as buying a house. But starting a 401(k) as soon as possible, and maximizing it with employer matches and other strategies, helps make retirement more feasible and will make your lifestyle more comfortable when the time comes. Plus, it will help reduce financial stress and anxiety when you no longer have income from a job, allowing you to more easily enjoy your retirement.


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