Saving and investing for retirement isn’t something that many people are familiar with until they’re thrust into the workplace and forced to make investment decisions for themselves. No one takes classes on retirement planning, it isn’t taught in high school, and even most parents don’t sit down with their children and go through the essential elements of saving and investing for retirement. That can make the actual decisions that go into retirement planning very daunting.
Some of the most common questions people ask themselves include how to start saving, what investment options are available, and how much to save each month. You may be wondering which is better: 401(k) or IRA? Those are all questions that need to be answered in order to come up with a viable retirement investment plan that will work.
One of the most common methods of saving for retirement today is through a workplace-sponsored 401(k) retirement plan. American workers have saved trillions of dollars through such plans, and their popularity continues to grow each year. But while 401(k) plans may make it easier for workers to save for retirement, there’s still one question all workers ask themselves: how much should I contribute to my 401(k)?
That’s a tricky question to answer, since everyone’s financial situation is different. But while the amount of an ideal or maximum contribution may vary from person to person, there are some general rules of thumb when it comes to recommendations for a minimum investment. And as with any other investment, you’ll need to know the ground rules before you start investing, such as the ins and outs of taxes, distributions, etc.
Once you’ve decided to contribute to a workplace 401(k) retirement account, it may become your primary retirement investment vehicle, as it is for many workers. That’s why it’s all the more important to make sure that you’re maximizing your returns so that you can set yourself up for a safe and comfortable retirement.
Because 401(k) accounts are funded through payroll deductions, they offer investors the ability to make significant investment gains without having to pay taxes until they retire decades down the road. That helps investors maximize their wealth. And once you have money in a 401(k) account, you can often transfer much of that money to other pre-tax retirement accounts such as IRAs.
An example of that is a gold 401(k) rollover, in which investors can roll over 401(k) assets into a gold IRA tax-free, allowing them to combine the tax advantages of a retirement account with the wealth preservation of an investment in gold. Read on to find out how you can make your 401(k) work for you.
The Ideal 401(k) Contribution Amount
Figuring out how much to contribute to your 401(k) is largely dependent on your station in life. The general rule of thumb is to try to contribute a sum equal to about 10% of your gross (pre-tax) earnings to a 401(k) each month. If you’re just starting out in the workplace and can’t afford that, you might be able to put away a little less without worrying, because time is on your side. If you don’t start saving until your 30s and 40s, you may want to contribute a little more than 10%.
Many companies that offer workplace 401(k) retirement plans also offer matching contributions. That may be a 1 for 1 match up to a certain level or a 50% match or some combination of the two. But generally if your employer offers matching contributions, they will max out at around 4-5% of your salary. That means that in order to hit 10% of your salary in contributions you may only need to have 5-6% of your paycheck deducted each pay period. There’s no reason to avoid taking full advantage of those matching contributions either, because that’s essentially free money that’s yours for the taking.
Of course, the greater the amount of your paycheck you can contribute, the better. If you can afford to have 10% or more of your paycheck deducted each pay period, especially if you’re just starting out in your investing, you can really take advantage of time and compounding to maximize your 401(k) investment gains. If you need to decrease your contributions in the future, you can always do that. Just be sure to continue taking advantage of those employer matches and remember that the earlier you start saving and investing, the more money you will have available to you in retirement.
Things to Consider When Deciding How Much to Contribute to Your 401(k)
How much you will be able to contribute to your 401(k) is also dependent on the number and type of expenses you have. If you’re single, you likely don’t have a huge amount of expenses, although you may still be earlier in your career and below your maximum earning potential. As your career progresses, you’ll start earning more money, but marriage, children, mortgages, cars, vacations, etc. will eat away at your salary and cut into the amount of money you’ll be able to save and invest.
When deciding on how much to contribute to your 401(k), you’ll have to anticipate your spending needs in retirement. That includes what kind of lifestyle you will lead, how much travel you will do, what healthcare expenses you might incur, etc.
You also need to factor inflation into the mix too, as your assets will lose 2-3% of their purchasing power each year to inflation. Since you could be retired for 30 years, even mild annual inflation of 2.5% per year would mean that prices would more than double between the time you retire and the time you die. Will you have enough money saved and invested to cover those price increases?
One thing to keep in mind is that no one ever reached retirement wishing they hadn’t saved and invested as much. Having more money in your retirement accounts is always better than having less, as it means that you have the ability and flexibility to do what you want to do. If it takes saving 10, 15, or 20 percent of your income to give you the life you want to lead, then take the necessary steps to ensure you can save that much money each month.
Starting to Save Later in Life
Not everyone is good about saving and investing from an early age. That’s particularly true for many investors who have entered the market over the past 20 years. After the bull market from 1982 to 2000, stock markets have failed to gain anywhere close to those types of gains since then, nor have they even gained close to the long-term average. And with two major market crashes in the past 20 years and a possible third crash right around the corner, many investors have understandably been gun-shy about investing in stock markets.
But even if you wait until you’re in your 40s or 50s before you finally decide to start investing, it’s not too late to build up a nest egg for retirement. For instance, once you turn 50, you’re allowed to make catch-up contributions. While the maximum allowable contribution to a 401(k) plan is $19,000 per year, those over age 50 are allowed to contribute an extra $6,000 per year, for a total of $25,000 per year in contributions. Over the 15-year period between ages 50 and 65, that’s a lot of extra money that can be saved in your 401(k) plan.
Your age is undoubtedly an important factor when you decide how much to contribute to your 401(k). Whereas saving 10% of your salary may be a good idea if you have a 40-year investing time horizon, older savers who may only have 15-20 years might consider upping that to 20%, or even trying to max out their annual contributions. It may take some cost-cutting elsewhere, but the rewards once you retire will be well worth it.
401(k) Contribution Limits
One thing to take into account when deciding how much to contribute to your 401(k) is the annual contribution limit. For 401(k) accounts and those that are similar such as 403(b), 457, and TSP plans, the annual maximum contribution is $19,000 per year. Those over age 50 can make an additional $6,000 in catch-up contributions per year.
IRA accounts also have annual contribution limits, with the limit in 2019 being $6,000 per year, or $7,000 per year for those over age 50. That means that you can contribute a total maximum of $25,000 per year to tax-advantaged accounts if you’re under age 50, or $32,000 if you’re over age 50.
While many people won’t get close to those limits, there are others who, either because of their salaries or because of their saving habits, will max out each year. Those contribution limits generally increase each year, although the exact limits vary based upon official inflation figures.
Diversifying Your Retirement Investments
Aside from figuring out how much to contribute to your 401(k), you’ll also want to determine what assets you’ll want to invest in. Diversification is key to maintaining the security of your assets and becomes especially important the closer you get to retirement. The last thing you want is to have all of your eggs in one basket and end up losing huge percentages of your retirement savings because you were overly invested in risky assets.
If your 401(k) plan doesn’t offer you the choices you want, think about opening an IRA account, a Roth IRA, or even just a standard brokerage account. If you have a decent amount of savings built up already, think about rolling over some of your 401(k) to gold in order to protect your assets during a rough economy. Once you have tax-advantaged retirement savings, it doesn’t take much to transfer those funds to other tax-advantaged accounts, allowing you to access a wider variety of investment assets than what your workplace 401(k) plan might offer.
So, while most people will stress out wondering how much to contribute to their 401(k) or what percentage to contribute, it can be far more important to worry about what you’re investing in through your 401(k). Without proper portfolio diversification, decades of saving and investment can be undone in a matter of months.
To sum things up, starting your saving early, taking advantage of matching 401(k) contributions, and properly diversifying your portfolio are the three primary keys to building up a nest egg that will see you through retirement. Once you’ve got those three things down, then you can start planning how much to contribute to your 401(k).
With a little bit of discipline and effort, you too can put yourself on the right path toward assuring your financial independence in retirement. Call the experts at Goldco today to find out more about how you can protect your retirement savings and make your 401(k) assets work for you.