Exactly How Much Should You Be Contributing to Your 401 (k) Anyway?
Saving money for a retirement treats a lot like cleaning your room or eating your vegetables-it's tedious but important, and everywhere you turn, someone's telling you to do it. Seriously, I do not spend a lot of time reading about money, but every financial article, "48
Given the many retirement-savings-crisis articles that come out every now and then, this isn’t that surprising. “According to a new survey from Bankrate.com...20 percent of Americans don't save any of their annual income [for retirement], and even those who do save aren't putting away a lot,” CNBC wrote earlier this year. "More than 40 percent of Americans are at risk of going broke in retirement," MarketWatch wrote a few months later. The Harvard Business Review weighed in, too: "We predict the U.S. "These statements paint a bleak picture-and-one that leaves many of us feeling like we're doing everything wrong.
These statements paint a bleak picture—and one that leaves many of us feeling like we’re doing everything wrong. How much of my monthly paycheck * should * go straight to retirement? What if I can not afford that right now? Am I S.O.L. if I've failed to save for several years, or can I make up for lost time later? 59
I spoke to two financial experts to get the basics on what we should all be doing to save for retirement. Specifically, I asked them about how to maximize a 401 (k)-an employer-sponsored savings account that takes a specific amount of money. (You get to choose how big or small that "specific portion" is-and if you try to withdraw your money early in the first place.)
If your company doesn’t offer a 401 (k) plan, you can apply the same basic principles to other retirement planning accounts, like individual retirement accounts (IRAs). Like a 401 (k), an IRA is effectively a retirement savings account you can put money toward from every paycheck . But unlike a 401 (k), IRAs take taxed (rather than pre-tax) dollars; any money you’re putting toward your IRA has already been taxed, whereas the money you put toward your 401 (k) won’t be taxed until much later, and probably at a lower rate.
Rule of thumb: Put 15 percent of your paycheck towards retirement, and start doing so as soon as you can.
Katie Taylor, vice president of thought at Fidelity Investments, recommends putting 15 percent of your paycheck toward your 401 (k)—as soon as you’re able to. “The ultimate goal is to have 10 times your ending salary saved up by the time you retire,” she tells SELF.
When your money is in a 401 (k), it compounds interest, which basically means it builds on itself. Typically, 401 (k)s earn a return rate between 8 and 10 percent, though today, some experts expect a more conservative 4 percent interest rate. Even then, it really helps your money grow over time to that 10x goal.
Let’s say your annual salary is $100,000. (For a nice, round number.) Fifteen percent of that is $15,000, which is how much you'll want to put into your interest-earning account each year ($1,250 a month). So, with 4 percent interest, the $15,000 you put in this year becomes $15,323 next year, which then becomes $31,259 the year after that (the $15,323 balance, plus the new $15,000 plus $936 in interest). Each year, as your 401 (k) balance grows, you’ll earn more and more in interest. In seven years, you're making more in interest each year than the $15,000 you're depositing from your paycheck . And after 40 years (if you work from age 22 to 62), you will end up with over $1.4 million.
(If you want to play around with a compound interest calculator, you can click here.)
Taylor estimates that your retirement savings—your 401 (k) plus any pensions or other savings you have—will make up about 45 percent of what you’ll have to live on in retirement. The rest will come from a monthly Social Security check .
One last thing: That 15 percent goals includes any matching contributions your employer is willing to make, according to Taylor. So if your employer is willing to match 5 percent of your 401 (k) savings, you only need to contribute 10. If they’ll match 3 percent, you only need to contribute 12—and so on. Just make sure what you’re contributing plus what they’re contributing equals 15, and you’ll be good.
If you can not (or do not want to) put 15 percent of each paycheck right retirement right now , you can still start savi ng up for retirement in a meaningful way.
Everyone's financial situation is unique. So rules-of-thumb-like that 15 percent rule. With student loan payments, bills, and other necessary expenses looming overhead, squeezing 15 percent out of your paycheck just might not be viable for you right now-and that's OK.
Bone Fide Wealth Bone Fide Wealth, and coauthor of The Millennial Money Fixtells SELF, noting the myriad. His advice: Look at your financial situation holistically before committing 15 percent to retirement (or feeling bad about not doing so).
Do you have student loans to pay off? If so, how aggressive is the interest rate on those loans? It’s possible that the rate of return on your 401 (k) won’t outpace the rate of interest on those loans; in other words, it might actually cost you more to put money toward retirement right now when you could be paying down that debt.
Another thing to consider: Do you have a rainy day fund? Boneparth recommends saving three to six months’ worth of expenses so you have them in case of emergency. You might not want to forego retirement savings entirely while building up this cash reserve, but it might make sense to split your savings between your 401 (k) and emergency fund until you’ve amassed between three and six months’ worth of savings.
If you’re meeting all your financial obligations and can still afford to contribute the full 15 percent to your 401 (k) every month, good on you. But if not, you have options. Taylor suggests contributing what you can to your 401 (k) and increasing your contribution by 1 percent every year, as well as every time you get a raise. Before you know it, you’ll hit 15.
And Boneparth recommends that you supply money to your company. "If you can get 3 percent for putting in 3 percent, get the money," he says. Even if you are feeling pressed for cash, a free doubling of your contribution is hard to turn down;
If you've made it this far, in the article, then you're ready to take the rescue for retirement seriously, and honestly, that's the first step.
It's hard to think about the future. You've got to be out with your friends. But if there's a piece of advice from you, you're going to hear about it. And if you think about the way retirement accounts work-that is, growing on their own, from interest-then it makes sense to fund one ASAP.
Then, do what you can, , or easing up to it. And check in from time to time to see your money grow. You can play around with one of the many (free!) Retirement calculators available online to see how your money will add up over time. This Fidelity tool asks you to answer six simple questions before giving you an idea of your retirement score. And this Vanguard tool lets you play around with different incomes, lengths of time, and the contribution of percentages to see what you'll need and how to get there.
You've taken the first step, which is caring. And, TBH, that's a lot more than a lot of people do, so consider yourself on your way to a comfy retirement life.