How Much To Contribute to a 401(k): From a Financial Advisor

Retirement can be expensive. Luckily, employer-sponsored retirement accounts, like the 401(k), can help you save money. They also offer possible tax benefits.

Still, the question remains: how much should you contribute to your 401(k)? Planning for a retirement that’s years or even decades away can feel overwhelming.

Everyone's financial situation is different. However, there are some general rules you can follow. These can help you find the right contribution level for your needs.

How Much Should You Contribute to Your 401(k)?

A common goal is to save 15% of your pretax income each year for retirement. This includes any contributions from your employer. This goal can also include funds saved in an Individual Retirement Account (IRA).

Employers often help with retirement savings in two ways. They may contribute a set amount or a percentage of your salary. They can also offer a 401(k) match.

A match usually means your employer adds money to your savings. For example, they might give 50 cents or $1 for every dollar you save. This continues up to a certain percentage of your salary. To maximize this benefit, prioritize contributing enough to your 401(k) to receive the full employer match.

However, be mindful of vesting requirements. Employers may stipulate that you remain with the company for a set period before their contributions become fully yours. Leaving before the vesting period ends could mean losing some or all of their matched contributions.

Why 15%?

This target comes from research. It suggests that most people need 55% to 80% of their income before retirement.

This amount helps them keep their lifestyle after they retire. Social Security might cover some of this. However, saving 15% of your income each year from age 25 to 67 can help you reach the rest.

Your savings rate can change based on several factors. These include when you start saving and your expected retirement lifestyle.

Other income sources, like pensions, also play a role. For instance, starting earlier may allow you to save less each year, while beginning later might require a higher savings rate to catch up. If you are unsure about your goals, talking to a financial advisor can help. They can find the best approach for your situation.

Contribution Limits for 2024 and 2025

The IRS sets annual limits for 401(k) contributions. In 2024, you can contribute up to $23,000, increasing to $23,500 in 2025. If you're 50 or older, you can make an additional $7,500 in catch-up contributions. Starting in 2025, those aged 60 to 63 can contribute even more, up to $11,250 in catch-up contributions.

There's also a combined contribution limit for you and your employer. This total is $69,000 in 2024 and increases to $70,000 in 2025. However, your contributions cannot exceed your total annual compensation from the company sponsoring your plan.

If you want to save more than the 401(k) limits, think about putting money into an IRA. This can help you save more with tax benefits.

What If You Overcontribute?

If you contribute more than the allowable limit, you may face extra taxes. This situation can occur if you switch jobs or participate in multiple workplace plans. To avoid penalties, request a refund of the excess contributions (and any earnings) by Tax Day. You should also receive a revised W-2 reflecting this income adjustment.

Maximizing Your 401(k) Benefits

Here are three tips to help you make the most of your retirement savings:

Start Early: Contributing to your 401(k) as soon as you can helps your savings grow. This is because your investment earnings can earn more returns over time. Over time, this can significantly grow your nest egg.

Start Small and Prioritize Matching: Saving 15% may feel daunting initially. Start with smaller contributions and increase them over time. If your employer offers a match, make sure you contribute enough to get the full benefit. This is free money for your retirement!

Keep Track of Your Accounts: Many people lose track of old 401(k)s after changing jobs. Keep a record of all your retirement accounts to ensure your savings are not left behind. You can roll over old 401(k)s into your current plan or an IRA to simplify management.

Bottom Line

Preparing for retirement is a journey that requires careful planning and consistent effort. By understanding your 401(k) options, taking advantage of employer contributions, and setting clear savings goals, you can build a strong foundation for your future. Start early, stay informed, and make adjustments as needed to ensure your retirement savings align with your long-term financial aspirations.

Sources:

https://www.fidelity.com/learning-center/smart-money/how-much-should-i-contribute-to-my-401k

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information