This is a question we receive very often! There’s an easy answer and a hard answer. First things first, the easy answer: Contribute at least enough to earn all of the matching dollars that your employer offers. Whether that match is small or large, it amounts to free money. The hard answer comes in if your employer is one of the few that doesn’t offer a match or if you’re trying to decide if you should contribute more than you need to get the match.
How much can you contribute to a 401(k)?
- The most you can contribute to a 401(k) is $19,500 for 2021 ($26,000 for those age 50 or older).
- Employer contributions are on top of that limit.
- These limits are set by the IRS and subject to adjustment each year
That limit dictates how much you can contribute, but it doesn’t tell you how much you should contribute. To figure that out, consider the following. Think about how much you’ll need in retirement. Contributing the maximum to your 401(k) requires a lot of money — especially as an ongoing, year-after-year commitment. It may or may not be enough to fund your retirement, or it could be even more than you need. Your 401(k)contribution amount should be guided by your retirement savings goal.
How much money you’ll need in retirement depends on when you plan to retire, how much of your current income you’d like to replace and how much you want to rely on Social Security. Most experts recommend saving 10% to 15% of your income, but our suggestion is to get a more detailed goal from working with a Fee-Only Certified Financial Planner™ professional.
If you need to start at a lower contribution and work your way up, that’s fine. Aim to contribute at least enough to grab the match, then bump up the percent you contribute by 1% or 2% each year.
Next week we’ll discuss the pros and cons of using Traditional and/or Roth IRAs to capture additional retirement savings.
Sourced from: https://www.nerdwallet.com/article/investing/how-much-to-contribute-to-401k