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

Today, workers are largely responsible for their own retirement savings and 401(k) plans are the main retirement vehicle for many.

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Updated May 13, 2024
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The money you contribute to your 401(k) plan is money you save for a future when you no longer have regular income from employment.

One of the main 401(k) goals might be to fund growth through diversified investments. Fidelity Investments, one of the largest managers of workplace retirement accounts, reported that the number of 401(k) millionaires in plans it manages jumped to 442,000 by the end of 2021.

The earlier you get started and the more consistently you contribute over time, the more likely you would be to join the ranks of these 401(k) millionaires one day.

But how much should you contribute to your 401(k) plan? The answer could depend on several factors, including your income and age. Let’s explore the influence of these factors.

In this article

What is 401(k)?

A 401(k) plan is an employer-sponsored retirement plan. It’s a defined contribution plan, meaning that the plan’s retirement benefits are defined by the level of the participant’s contributions plus any employer contributions.

This is in contrast with a defined benefit plan such as a pension. In a defined benefit plan, the employee gets specific lump-sum or pension payments based on their company tenure and earnings.

The amount of money a 401(k) plan provides when you retire is the total of your contributions, your employer contributions, and the investment return the plan may earn. Knowing how to save for retirement could help you live comfortably in retirement. When you invest in your 401(k) as early as possible, you allow your investments time to grow.

How 401(k) contribution limits work

There are two types of contribution limits for a 401(k) plan:

  • The annual salary deferral contribution limit: This is how much an employee could contribute using their pre-tax dollars. The maximum contribution is $23,000 in 2024 and is raised periodically. The limit increases if you’re 50 or older, allowing you an extra $7,500 catch-up contribution in 2024. This brings the total contribution limit to $30,500.
  • The overall limit: This is the upper cap for employee and employer contributions. This limit is $69,000 for 2024, with a limit of $76,500 for employees over 50.

How much should I contribute to my 401(k)?

The bigger your tax-free 401(k) contributions are, the more you might benefit from their growth over time. But the size of your contributions might depend on several factors. To find the answer that fits your income and budget, you should:

1. Determine your ideal lifestyle

Before you do any calculations, think about how you want to spend your retirement. Envision your post-work life in as much detail as possible.

You’ll need to have a solid idea of your retirement goals in order to know how much you should contribute. This way, you’ll not only be saving enough to meet your basic expenses but also to fully enjoy the retirement you’ve worked so hard to attain.

2. Determine the 401(k) contributions you can afford

Experts believe you should contribute anywhere from 10% to 15% of your annual income.

For someone earning $50,000 per year, this equates to contributions in the $5,000 to $7,500 range. For someone earning $100,000, this equates to annual contributions in the $10,000 to $15,000 range.

If you can't afford to contribute that much, you could still contribute as much as possible. Many 401(k) plans have an option for automatic increases each year. You could set your 401(k) plan to gradually increase your contribution percentage. Increasing by 1% each year could help set you up for a more comfortable retirement.

Using one of the best budgeting apps available might help you find exactly how much money you could add to your retirement account from each paycheck you receive.

3. Factor in your age

It’s always best to start investing early and often. Starting early allows you to make smaller contributions and still have a good amount of money in your 401(k) when you retire.

But it’s still never too late to save for retirement. If you’re starting at an older age, you might want to aim for bigger contributions to build up your retirement account quickly. The Internal Revenue Service (IRS) allows you a higher limit of contributions — known as catch-up contributions — after 50.

Using a retirement calculator might help you determine the retirement savings rate you need to achieve certain goals. Planning around this rate in your monthly budget could set you on course for a more comfortable retirement.

4. Estimate your Social Security benefits

You’ll want to take a peek at your anticipated Social Security benefits, too. Sign up for a Social Security account to view both your monthly and yearly payout based on your retirement age.

If you aim to retire before 2034, you should receive your full benefit amount in retirement. If you aim to retire after 2034, play it safe and plan on receiving about 78% of the amounts listed.

Add your estimated Social Security benefit to the payouts you expect to receive from your other retirement accounts. Just like you did in the last step, keep this figure handy.

5. Use your 401(k) match program as a guide

If you’re offered a 401(k) plan with a company match, it is usually beneficial to contribute enough to take full advantage of the amount you could receive. When a company matches employee contributions it’s essentially giving you free money, and it could help enhance the amount available to you in the plan down the road.

Some companies will offer a full match up to a certain percentage, while others offer a partial match. For example, if you earn $50,000 per year and contribute 6% of your salary, you’d contribute $3,000. If the company is offering 3%, or $1,500, in matching contributions, you’d essentially get an additional 50% return on the $3,000 you contributed. The matching contribution and their earnings from investing could add up over time.

How your 401(k) is invested matters

The amount you contribute to your 401(k) over your working years is essential in determining how much you will have when you retire. But deciding how much to contribute to your 401(k) plan might also depend on the underlying investments offered in the plan.

Understand your risk level

Your investment strategy for your 401(k) should reflect your goals and risk tolerance. Younger investors might consider a more aggressive asset allocation, as they have the time to take more risk. These investors could also benefit from the compounding rate of return on their investment.

When you’re closer to retirement, taking too much risk might result in significant losses during a major market decline. On the other hand, being overly conservative when you’re younger might cause your nest egg to fall short of your retirement needs.

Carefully consider your financial situation and investment options when deciding your strategy. Getting help from a certified financial planner (CFP) could also go a long way.

Consider using target-date funds

You might consider reducing your equities allocation over time as you get older. Many plans offer managed accounts like target-date funds that offer an age-based allocation. These funds decrease the stock allocation over time as the fund's target date gets closer.

The gradual shift to smaller stock allocation allows you to better retain the gains you made on your investments by reducing your risk level. Your money would instead be placed in more stable assets such as government bonds.

Don’t forget your other assets

Another consideration for people who have investments outside their 401(k) plan is to include those assets when contemplating their overall asset allocation.

Other investment accounts might include IRAs (individual retirement accounts) and taxable investments. IRAs can come in the form of both traditional IRAs and Roth IRAs. Depending on where you work, you might also be able to open a Roth 401(k). You’ll typically want to have a certain amount of emergency fund money on hand in a savings account as well.

Your traditional 401(k) isn’t the only part of your retirement savings plan, so you should consider all your assets when judging your risk level and diversification.

401(k) vs. IRA

Generally, it could be beneficial to use both an IRA and your 401(k) to invest for retirement. That said, everyone’s situation is different, and the answer to this question may vary by individual.

In many cases, a 401(k) plan might be a suitable option if you are deciding between a 401(k) and an IRA because:

  • The annual contribution limits are higher for a 401(k) than for an IRA.
  • 401(k) plans may offer employer matching contributions, which is not available with an IRA.
  • 401(k) plans offer protection from creditors, something that is not available with an IRA in several states.

Using an IRA in combination with your 401(k) could be a powerful tool. In addition to any contributions you might make to 401(k), you could make further post-tax contributions to a Roth IRA to maximize your yearly contributions.

But if you’re a high-income earner and have maxed out your annual contributions to your 401(k), you should keep in mind that there are also yearly Roth IRA contribution limits in place, as well as income limitations

These limits don’t apply to contributions you roll over, which may allow retirement strategies such as backdoor Roth IRAs.

FAQs

How much should a 35-year-old have in a 401(k)?

A study by investment management company Vanguard indicates the average total retirement savings at 35 is between $33,272 and $86,582. This could be in a 401(k) or an IRA. Several studies have been conducted regarding how much you should save for retirement. Keep in mind that this study and others provide general guidelines.

What percentage should I contribute to my 401(k)?

The rule of thumb that many financial advisors and experts use is to contribute 10% to 15% of your annual income to your 401(k). You could also aim to contribute as much as needed to at least maximize your employer contributions through any matching program you’re offered.

If you aim to retire early, your contribution rate should be as high as you can afford. For example, those who seek the FIRE strategy (financial independence, retire early) significantly cut their living costs to direct more money to their retirement fund.

What happens to your 401(k) when you quit your job?

The money you’ve contributed to your 401(k) and the earnings on that money continue to be yours when you quit your job, though you may be subject to fees that you didn’t have to pay as an employee.

When you leave your employer, you have several options for your 401(k).

  • Roll over your 401(k) to an IRA account to an outside custodian.
  • Take a partial or full distribution. However, 401(k) distributions are subject to income taxes, and withdrawals before age 59 1/2 might also be subject to a penalty.
  • Leave the money in the 401(k) or roll it over to a new 401(k) plan with a new employer if they accept this type of rollover.

Is 401(k) or Roth IRA better?

There are advantages and disadvantages to a Roth IRA versus 401(k), so the answer might depend on your situation.

The annual 401(k) contribution limits are higher than the limits for a Roth IRA, allowing you to contribute more to a 401(k) account if desired. Additionally, Roth IRA contributions might be limited by your income if you’re a high earner. There is no such income limitation for a 401(k).

On the other hand, Roth IRAs are available to anyone with earned income. IRAs might also have a bigger selection of investment assets, allowing you to have more freedom when adjusting your portfolio.

Bottom line

In today’s world, workers are primarily responsible for saving for retirement on their own. Pension plans are largely outdated, especially in the private sector. Most employers offer a 401(k) plan as their main retirement savings vehicle for their employees.

Budgeting and getting your personal finances in order might free up more money to increase the maximum amount you could contribute. It might also help to speak with a financial advisor about your retirement savings plan.

Investing money early in your career and regularly throughout your working years is key to building a solid retirement nest egg. But remember, it’s never too late to save for retirement. As some may say, the best day to start investing for retirement is today. The next best day is tomorrow.

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Author Details

Chad Methner

Chad Methner graduated from the Ohio State University with a degree in Communication Technology and holds an MBA from Franklin University in Ohio. Chad started a blog in late 2016 that tracked his net worth while he paid off over $40,000 in consumer debt.

Author Details

Yahia Barakah, CEPF

Yahia Barakah, CEPF, is a Senior Editor at FinanceBuzz and has created finance-focused content since 2011. As a Certified Educator of Personal Finance, he has a background in institutional investment and asset management, as well as a deep passion for financial literacy.