401(k) contributions: How much is enough?

What is an appropriate amount to put into a 401(k)?

When you get your first full-time work, your company may give you a 401(k) (k). Most financial gurus advise enrolling in a 401(k) as soon as possible if you work for a business that offers one. Why?

Reasons why you should contribute to a 401(k)

401(k)s are employer-sponsored retirement savings plans.

If you work for a tax-exempt or non-profit organization, or a state or local municipal government, you may be offered a 403(b) or 457 plan, which are similar to 401(k) plans, but be sure to grasp the nuances before investing.

401(k) benefits include:

  • Lower taxes: Invest your paycheck before taxes. The money isn’t taxable, lowering your tax burden. Don’t exceed annual contribution and income restrictions.
  • Automatic savings: Unnoticed, Your paycheck deducts the contribution, so you don’t spend it. Regular contributions grow your balance.
  • Matching funds: Many businesses match a percentage of your 401(k) contributions. They may match the first 3% of your pay up to $3,000. The match adds $1,500 to your $50,000 salary.
  • 401(k)s grow: If you start saving in a 401(k) early in your career, compounding will allow you to earn returns on both your contributions and your investment returns! Good market circumstances accelerate your balance.
  • 401(k) funds are forever: If you change jobs, you can transfer your 401(k) balance to your new employer’s plan and keep building it.

How much money should you put into a 401(k)?

When you’re young, it’s hard to imagine your life in 30 or 40 years and estimate your financial needs. Pensions and lower life expectancies made retirement simpler two decades ago.

People are living longer, pensions are less prevalent, and Social Security’s future is uncertain.

Your retirement may last 20–30 years, unlike your grandparents’ 10-15 years! That’s a longer term to fund. Therefore, experts advocate depositing 10-15% of your annual pay in a retirement savings vehicle like a 401(k) (k). That’s a lot of money to save when you’re starting off and paying off college loans. Start low and aim high.

Consider these:

  •  Start modest, but match your employer’s contribution. Leave money on the table only when necessary.
  • Consider contributing 1% more each year. Maintaining growth is simple with that formula. See how saving 1% more annually can boost your savings.
  • Contribute 15% or more of your pay by 40.
  • Review retirement funds at 50. Now you can better estimate how much you’ll need and whether you’re on track.
  • If you have a gap, use the government’s greater “make-up contribution” for those over 50.

This graph shows how much a $60,000-a-year worker with a 3% rise would save after 30 years at different investment levels. Two percentage points can be worth over $150,000 in this example.

For demonstration only. $60,000 salary, bi-weekly contributions, 3% yearly wage rise, and 7% return. Investments change in value when redeemed. Pre-tax balances are liable to income taxes upon distribution. Values exclude costs.

Leave a Reply

Your email address will not be published. Required fields are marked *