Retirement is meant to be a well-deserved permanent vacation after we dedicate years of our lives to our careers. However, statistics on retirement savings are a cause for concern as Americans are not saving enough for their retirement. Seventy-eight percent of Americans report that they’re ‘extremely’ or ‘somewhat’ concerned about not having enough money for retirement and nearly a quarter of Americans have nothing saved at all.
One of the most common questions we get when talking with employees during a 401(k) meeting is ‘How much should I contribute into my 401(k) plan each year?’ While everyone’s unique lifestyle and retirement plan is different, we encourage most participants to contribute as much as they can into their 401(k) plan.
For 2018, the statutory limit for 401(k) contributions is $18,500. For any person age 50 and over, the law allows you to contribute an additional $6,000 as a “catch-up” contribution. So, if you’re 50 years or older in 2018, you can contribute a total of $24,500.
Everyone’s financial situation is different. For some people the maximum contribution may be too high, while for other’s it is reasonable. Take a look at the considerations below to help you decide how much you should contribute into your 401(k) plan each year.
What if you can’t contribute the maximum amount into your 401(k)?
If you can’t contribute the maximum amount to your 401(k) plan, I encourage you to see if your employer offers a match. Some companies will match some, or all, of your 401(k) plan contributions. If that’s the case, you should contribute at least the amount that will earn you the maximum company match. A company match is essentially free money towards your retirement. For instance, if your company matches contributions up to 4% of your gross pay, I’d encourage you to try to contribute at least 4% of your gross pay into the 401(k) plan. That way you are maximizing every dollar available to you.
What if your company does not have a match?
If your company doesn’t have a match, that shouldn’t discourage you from contributing to your company’s 401(k) plan. As a rule of thumb, we recommend saving at least 10-15% of your income in a retirement plan. If this number is too high for you, then look at your income needs. How much monthly income will you need in retirement? This is a good starting place to give you an idea of how much you will need to save to maintain your lifestyle in retirement. A financial advisor can show you how much your retirement plan savings will provide compared to your expected spending through retirement. If these numbers don’t match up, you will either need to adjust your lifestyle (downsize, move, spend less, etc.) or save more for your retirement now! Your advisor will also recommend changes to achieve your retirement goals.
Contribute a percentage of your pay
When deciding how much to contribute into your 401(k) plan, pick a percentage of your income, rather than a flat dollar amount. This way, your contributions are automatically increasing when your income is increased. For example, let’s say you currently make $50,000 a year and contribute $2,500 or 5% into your 401(k). If you receive a 10% raise, you will automatically contribute 10% more to your retirement; so your new yearly contribution will be $2,750.
Consider increasing your contribution rate incrementally each year
You can start small by contributing 3 or 4% but then consider increasing your contribution percentage 1% each year until you are able to maximize your contributions. So if you make $50,000 a year and contribute 5% ($2,500), receive a 10% raise, and increase your contribution to 6%, your contribution for the next year would be $3,300.
Contributing to a company sponsored 401(k) plan is a great way to save for your retirement and prepare for a comfortable future. If you have any questions about your 401(k) plan contributions, please do not hesitate to reach out to me.
Let's Keep The Conversation Going
Send Michael Richardson a note.