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4 Ways to Decide How Much to Contribute to a 401(k) in Your 20s

Retirement Planning
A young woman considers how much to contribute to a 401(k) in her 20s

Key Takeaways

  • Determine Retirement Age: Calculate an ideal retirement age and work backward to establish how much you need to save each month and year to retire comfortably.
  • Savings Percentage: Aim to save at least 15% of your pre-tax income for retirement, taking advantage of the pre-tax contributions and potential employer matches offered by a 401(k).
  • Time in the Market: Allow your money to grow steadily over time by consistently investing, instead of trying to time the market, to take advantage of potential growth and recover from economic swings.
  • Consider IRAs: In addition to a 401(k), explore opening a Roth or traditional IRA to further boost your retirement savings and choose the option that aligns best with your tax and withdrawal preferences.

When you're in your 20s, retirement is probably not top of mind. At this point in your financial journey, between student loan payments, monthly rent and car payments, you may not be thinking about retirement planning — or even have a lot left over to save. Time is one of the most powerful tools when it comes to retirement savings.

There are a number of considerations that can help you identify how much to contribute to a 401(k) in your 20s, but ultimately, the amount is different for everyone. It all depends on your current situation and abilities. It's typically best to start small (and as soon as possible).

Retirement may be years away, but contributing even $50 or $100 now could make a big difference when you're ready to retire. If you don't believe this, just run the numbers in any retirement calculator and it will show you the benefit of saving small sums when you're younger.

Here are four considerations that can help you set a 401(k) contribution goal for yourself.

1. Calculate Your Retirement Age

Before you decide how much you should put in a 401(k) in your 20s and start saving, consider when you might want to retire.

Though this is a difficult determination to make in your 20s, you probably have an idea of what you value most and what kind of lifestyle you want to enjoy in your later years.

To get started, decide on an ideal retirement age, then work backward from there to figure out how much you need to save each month (and each year) to retire by that time. Compound interest can play a big role in helping you reach those amounts.

2. Decide How Much You Want to Save

Once you have a target retirement age, you can work to decide what percentage of your income you're able to save. First, look at all your expenses and your after-tax monthly income. How much do you have left over? If it's $500 a month, you may decide to put $250 into your 401(k) and the remaining $250 into an emergency fund.

You can also schedule automatic monthly withdrawals from your checking or savings account to go toward your retirement account. That way, you never have to think about it. This can also help build your savings habit. After all, if the money immediately goes into your retirement account each month, you likely won't miss it.

3. Understand the Importance of 401(k) Contributions

Financial experts typically recommend you save at least 15% of your pre-tax income for retirement.1 One of the benefits of contributing to a traditional 401(k) is that you contribute using pre-tax income, which also means you get a tax deduction on your contributions. For example, if you make $3,000 a month and contribute $100 a month to your 401(k), this would reduce your taxable income — or the amount of your income the government can tax — to $2,900 a month.

Another reason to contribute to a 401(k) is that time in the market — or the amount of time your money is invested — gives your money time to potentially grow and recover from economic swings. This can be a better approach than trying to predict when the stock market will go up or down. Even the most seasoned investors and experts have no idea when this will happen, so it's therefore wise to invest steadily over time.

An employer match is another good reason to contribute to a 401(k). Some employers will match your contributions up to a certain percentage. For example, if you contribute 3% of your salary to a 401(k), your employer might also contribute 3%. This is essentially free money you can use to grow your retirement savings, so try to contribute at least the amount your employer matches, if possible, to take full advantage of this benefit.

4. Consider Opening a Roth or Traditional IRA

Along with contributing to your 401(k), consider opening a Roth or traditional IRA. A Roth IRA is funded with after-tax dollars, while a traditional IRA is funded with pre-tax income. Once you reach age 59½, both Roth and traditional IRAs allow you to withdraw money without incurring tax penalties, as long as other requirements are met.

A Roth IRA allows you to take out money without needing to pay taxes on the withdrawals. A traditional IRA allows you to save pre-tax dollars — which can help build your retirement savings and allow you to deduct your contributions, thereby reducing your taxable income — but you'll have to pay taxes on withdrawals.

If you have additional money left in your budget at the end of the month, funding IRAs can help put you on the path to a more comfortable retirement. Again, the more time your funds have to grow, the larger they could potentially be when you're ready to retire.

The Bottom Line

If you're still wondering how much you should put in a 401(k) in your 20s, consider reaching out to an experienced financial professional for more insight. Starting now could prevent you from having to save larger amounts when you're older.

As the saying goes, the early bird catches the worm. With retirement, that can be especially true.


  1. How much should I save for retirement? https://www.fidelity.com/viewpoints/retirement/how-much-money-should-I-save

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Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.