How much should I put in my 401(k) plan?
Retirement may seem like a long way off, but that doesn’t mean you should put off planning for it. Even when you’re (relatively) early in your career, it’s important to think about how much money to put into your 401(k) vs. other investments:
- Most retirement experts recommend putting 10-15% of your income each year into retirement
- In 2022, the maximum contribution limit is $20,500 for most individuals and $27,000 if you’re aged 50 or older
- You should work with a financial advisor to determine your ideal 401(k) contribution rate
What exactly is a 401(k) plan?
Most companies offer a 401(k) retirement plan to help their employees contribute toward their financial future. Starting in the 1980s, it grew in popularity compared to pensions, and now is the primary retirement benefit that companies provide.
It works like this: your employer chooses certain investment options, then you get the chance to create a portfolio. You then contribute to that portfolio each pay period with pre-tax contributions. These contributions then lower your taxable income and, as a result, your tax burden each year.
In most cases, your employer will also match your 401(k) contributions up to a certain percent. For example, they may offer a 50% match on all your contributions up to 6%, which brings your total contribution up to 9%. This match is a core part of your compensation package, and you should never leave it on the table if possible.
How much should you contribute to your 401(k)?
As we mentioned earlier, 10-15% is the standard recommendation for retirement contributions each year. But how much of that should go to your 401(k), and how much to other accounts?
Here’s one advantageous strategy to make:
- Contribute up to the employer match first.
- Then contribute to a Roth IRA (these are post-tax accounts where you invest money after taxes, then allow it to grow tax-free) up to the annual limit of $6,000 if you’re under 50 and $7,000 if you’re over 50
- After that, max out your 401(k) until you reach the $20,500 annual limit ($27,000 for those over 50)
However, you should consult a financial advisor to determine the best investment strategy for your situation.
401(k) Strategy Tips for Investment Success
Now that you have a basic overview of what a 401(k) is and how much you should contribute to it, here are three tips to help maximize your success as you prepare for retirement.
1. Build an emergency fund first.
Like we said earlier, you should always claim your employer's 401(k) match, since that’s part of your job compensation that you’re leaving on the table. Aside from that, however, you should always make sure you have an emergency fund of 3-6 months of expenses saved before you ramp up your investing. That way, if you end up in a financial emergency, you won’t have to dip into your 401(k) or borrow against it to make ends meet.
2. Contribute early and often.
The earlier you are in your career, the more time your money has to grow. While you may be tempted to put off saving for retirement until you’re older, it’s always better to start earlier rather than later. So don’t be shy about putting that 15% away, even if it means foregoing a couple of concerts or nice dinners. Your future self will thank you for that sacrifice.
3. Increase savings rate over time.
Especially at the beginning of your career, saving that 10-15% may seem too much. But you should at least put something toward your financial future. Then, as your income increases over time, you can increase your savings rate.
As you start on your investing journey, you may feel like you can’t contribute enough to claim your employer match. That’s where Matchly comes in. Use the calculator below to see how much employer match you can get with Matchly.
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