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How Much Should I Contribute to My 401(k)?

Retirement Planning
A young couple discusses how much they should contribute to their 401(k)

The percentage of income to save will depend on several factors. After taking these into consideration, you can make an informed decision about how much you should be saving for retirement. 

Key Takeaways

  • Contribute enough to your 401(k) to receive the full employer match.
  • Gradually increase your contribution percentage over time, especially with pay raises.
  • Consider other retirement accounts, like IRAs, when determining your total savings rate.
  • Factors like retirement income needs, life expectancy, current savings, years until retirement, and risk tolerance influence the ideal contribution.
  • Use online calculators or consult a financial professional to determine the right contribution percentage for your specific situation.

Considerations Around Contributing to a 401(k)

Perhaps the most important question to ask yourself with regard to retirement planning is, "What percentage should I contribute to my 401(k)?" You may have heard that you should typically contribute at least 10% of your salary to your 401(k), but everyone's financial situation is different. For additional guidance, you can also review some general tips for contributing to a 401(k) plan.

Keep these considerations in mind when deciding how much to contribute to your 401(k):

Take Full Advantage of the Employer Match

If available, it's wise to always contribute enough to your 401(k) plan to receive the full matching contributions from your employer. For example, if your employer's 401(k) plan offers a 50% matching contribution up to 6% of your base salary, your 401(k) contribution percentage should be at least 6%.

Gradually Increase Your Contribution Percentage

It's generally a good idea to increase your 401(k) contribution percentage over time. For example, when you get a pay raise, consider giving your retirement savings a raise by increasing the percentage you contribute to your 401(k).

Factor in Other Retirement Accounts

Your total retirement savings rate will likely include retirement vehicles other than your 401(k), such as an individual retirement account (IRA). For example, if your target retirement savings rate is 20%, you can reach this goal by contributing 15% of income to your 401(k) and 5% of your income to an IRA, assuming you remain within the respective contribution limits.

MORE Is There a Right Age for Opening an IRA?

5 Factors That Can Affect Your 401(k) Savings Strategy

You can determine your ideal 401(k) contribution percentage with the help of online financial calculators or the guidance of a financial professional. No matter which resource you use, the right 401(k) contribution rate for you will depend on at least five primary factors:

1. How Much You'll Need to Retire

A common rule of thumb is that you'll need about 80% of your pre-retirement income in retirement.

2. How Long You Expect to Live

The number of years you'll need retirement income is a major determining factor in how much you'll need to retire. While no one knows exactly how long they'll live, you can make estimates based on your and your immediate family's health and longevity.

3. How Much You've Already Saved for Retirement

The higher your 401(k) balance, the less you'll generally need contribute to your 401(k) plan as you approach retirement. The lower your balance, the more you'll need to play catch up by contributing a higher percentage toward your retirement. To help determine how much your 401(k) could be worth over time, you can use a 401(k) growth calculator .

4. How Many Years You Have to Go Until Retirement

The more years you have left in the workforce, the longer you have to grow your retirement assets.

5. How Much Risk You Are Willing to Take With Investments

Higher risk investments can potentially produce higher returns over time compared with lower risk investments. Thus, all other factors being equal, you may not need to contribute as much to your 401(k) if you are willing to take on more risk. Adversely, if you want to take the low-risk route, you may need to compensate by contributing a higher percentage to your 401(k). Keep in mind that investments cannot guarantee growth or sustainment of principal value; they may lose value over time. Past performance is not an indication of future results.

Secondary factors — such as Social Security income, rate of inflation, rate of return on investments, employer matching contributions and 401(k) contribution limits — can help to determine your ideal 401(k) contribution rate. After you figure the primary factors, a good retirement calculator can help you arrive at a closer estimate of how much you need to contribute to your 401(k).

Getting Help When You Need It

Along your retirement savings journey, when you find yourself reflecting on questions like "How much should I contribute to my 401(k)?" or "What percentage should I contribute to my 401(k)?" — remember to review these five factors and use financial calculators to help you make the right decision for your financial situation.

Additionally, you can always enlist the help of a financial professional to bring all of the planning elements together to determine the right 401(k) contribution percentage.

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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.