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How Much Should I Contribute to My 401K?

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Aim to Put 15 Percent of Your Salary in a 401K or IRA

Saving for your retirement is one of the most important things you can do at any age, but it's so easy to defer contributions to get a higher paycheck. Perhaps your kids need braces or you want to save for that family vacation to the Bahamas, so you skimp on the percentage of your salary that automatically goes into a retirement account. The problem comes when you near retirement, long after that family vacation, and you realize that you don't have nearly enough to stop working anytime soon.

In a study of data from Vanguard published in 2017, the average 401K account with the financial organization had saved $96,495, while the median balance was $24,713. That first figure might sound pretty good, but conventional advice suggests having at least 10 to 12 times your annual income in savings when you retire—if you make $60,000, that's a minimum of $600,000.

Another way to plan: Multiply your current annual salary times the number of years you hope to live after working (of course, this can never be determined in advance) to keep with your current style of living. If you make $40,000 and plan for a 30-year retirement—say, from 65 to 95—you'll need $1.2 million in your account.

Deciding How Much to Save

Although saving anything is better than saving nothing, you should aim to save at least 15 percent of your pretax income from each paycheck from age 25 to 67. This could be entirely from personal contributions or, if your company offers an employee match, it could be a combination of personal contributions and the match. However, if you didn't start saving in your 20s, you probably want to bump that percentage up a notch or two.

If your employer offers a matching program, contribute at least the maximum that the company matches. For example, if your company matches up to 5 percent, aim to contribute no less than 5 percent of your own money.

However, if your company doesn't offer a matching program, you should try to contribute even more of your own money to make up for that loss. The catch is, of course, is that you shouldn't contribute so much of your own income that you can't pay for other necessities in your budget.

Increasing Contributions

If you can't start off saving as much money as you would like, inch up your contributions every year or with every raise you get. Adding 1 percent to your contributions probably won't seem like a significant amount in your paycheck, but it will make a significant impact in your retirement years.

Beware of decreasing contributions to your 401K. Not only will it decrease the amount of money you have in the account for retirement, but because retirement contributions are taken from your pre-tax paycheck, it will also increase the amount of money that's taxable.

Maximum Allowable Contributions

The Internal Revenue Service puts a cap on the amount of money you can contribute to a retirement plan each year. For 2021, the max amount that you can put into a 401K plan is $19,500 per year if you are 49 or younger. Those who are age 50 or older can do "catch-up contributions" by adding another $6,500 for a total of $26,000 yearly.

The IRS also limits the amount that can be added to a retirement from all sources—including from an employer-matching or profit-sharing program. In 2021, the limit is either 100 percent of compensation or $58,000, whichever is less.

If you also have a Roth or Traditional IRA, which is a retirement account that's not tied to employment, you can contribute up to $6,000 if you are 49 years old or younger. People age 50 or older can contribute an additional $1,000.