Many employers offer a 401(k) plan as a retirement savings vehicle that can be used to store away funds to support the employee throughout their retirement. While the program has been around for quite some time, the same question always seems to come up. How much should you contribute? While this answer is different for everyone, there are some general rules of thumb about determining how much you should personally contribute to a 401(k):
- At A Minimum Enough To Take Full Advantage Of The Employer 401(k) Match
- Enough To Fund Your Future Lifestyle
- Enough To Lower Your Current Tax Liability
At A Minimum Enough To Take Full Advantage Of The Employer 401(k) Match
A company match is an amount of money that an employer is willing to contribute if and only if the employee contributes a certain percentage. Some employers match the contributions of employees dollar for dollar up to a certain percentage of their income. Others operate on a partial match situation where they would match contributions on a one to two basis or another contribution ratio. Employees need to, at a minimum, fully take advantage of the employer match or else they are literally leaving free money on the table and their retirement will be far less funded.
Enough To Fund Your Future Lifestyle
Every working adult has a different view of what retirement looks like to them. Some envision doing nothing more than relaxing on the beach with a cold drink in their hand while others dream of globetrotting and exploring foreign lands for decades to come. The fact of the matter is that these two retirement styles have very different price tags. The key is to save enough in a 401(k) to match your expected lifestyle.
Enough To Lower Your Current Tax Liability
One of the greatest benefits of a Traditional 401(k) is that contributions to it can be used as a tax write off. This is done by deducting the amount an employee has contributed to their 401(k) from their total taxable income. This is especially effective if it places them in a lower tax bracket. Because this money is taxed as income in retirement when they will typically make less money per year, employees will minimize their overall tax liability over time.