How Much Should You Contribute to a 401(k)?
When you start a new job and sign up for your company's 401(k) plan, you will need to decide how much to contribute to the account. This seemingly simple decision will affect how much is withheld from your paychecks, your annual income tax bill and how much money you will have in retirement. Here's how to determine the amount to save in your 401(k) plan.
Qualify for the 401(k) match. Find out how much you need to save to qualify for any 401(k) match your employer provides. The most common 401(k) match formula is 50 cents for each dollar saved, up to 6 percent of pay. Employees in this type of plan would need to contribute as least 6 percent of their salary to the 401(k) plan to get the maximum possible 401(k) match. Saving 6 percent of your pay in a 401(k) plan and earning a 3 percent 401(k) match means you are tucking away an amount equal to 9 percent of your salary each pay period for retirement.
For a worker earning $50,000 per year, this means an annual 401(k) contribution of $3,000, plus another $1,500 in employer contributions. "At a minimum, employees should always contribute enough to receive their employer match," says Christina Empedocles, a certified financial planner for Insight Personal Finance in San Francisco. "Getting a 50 percent or 100 percent return on investment by capturing an employer's contribution is a powerful incentive."
Aim to save more than 10 percent. Saving enough to qualify for a 401(k) match allows you to capture valuable employer contributions, but you may need to save more than that to end up with an adequate nest egg for retirement. Only 28 percent of 401(k) plans provide a suggested savings rate to participants, according to a Plan Sponsor Council of America survey of nearly 600 401(k) and profit-sharing plans. But when a savings rate is suggested, it's typically 10 percent or more. "Our rule of thumb is to save 15 percent annually at any point throughout your career, and that includes any contribution your employer might make," says Meghan Murphy, a director at Fidelity Investments. Other 401(k) providers recommend similar savings rates. "Typically we would recommend that a person save 12 to 15 percent of their salary for retirement," says Shannon Nutter-Wiersbitzky, head of participant strategy and development at Vanguard.
(From an April 9, 2018, post on the U.S. News & World Report website.)