Money Talks, So Should You

Q&A: How much should I contribute to my 401(k)?

Tracy St. John
by Tracy St. John, The Garrett Network  (@FinancialAvenue)

How much you contribute to your 401(k) does depend on what you can afford. However, if you are not a disciplined person in general and do not feel you are good at saving money, I urge you to save something through your employer’s 401(k) plan

If the amount is deducted and set aside for your benefit, then your take-home pay is yours to do as you wish and you have also saved.

READ: The cost of starting late with retirement saving

Priorities for how much you should be saving:
1. Save up to as much as you are able to get a full match or other contribution from your employer. For example, if your employer will give you 50 cents for every dollar you contribute up to 6 percent, that means if you save 6 percent of your gross paycheck, you will get another 3 percent for FREE. It’s like getting a bonus for doing something for yourself!

You just set aside 9 percent of your gross pay but only 6 percent was your money.

2. Always contribute as much as possible, and even if that means you can save more than what your employer matches, do it! It is also much easier to gradually increase the amount each year by 1 percent, instead of increasing by 3 percent or 5 percent five years later.

3. If you honestly believe you cannot afford to contribute, contribute anyway and start at 1 percent. You will notice that you will adjust your spending to your take-home pay. Then, consider increasing to 2 percent two years later, 3 percent two years later and so on.

READ: From spender to saver in three simple steps

Additional comments:

1. Many employers have something called contribution acceleration. This means that your contribution will automatically increase by 1 percent each year until it reaches a maximum percent set by the employer.

The average tends to be 7–10 percent. If it is offered to you, it will be to your benefit to do this, and you do have the option to opt out at anytime if you need to.

2. Your goal throughout your work career should be to save between 15 percent and 18 percent of your gross pay, which includes any employer contributions. For example, if you save 6 percent and you receive a match of 3 percent, you are at 9 percent total.

Continue to increase your contributions by 1 percent per year until you reach 15–18 percent total contributions.

Most employers allow you to adjust your contribution amount so check with your human resources department to learn about the frequency with which you may make changes.

ALWAYS save in your employer’s retirement plan, and you will have a head start on those who do not.

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Tracy St. John is the founder of Financial Avenues, LLC, a Fee-Only financial planning and investment advisory firm. She obtained her Masters Degree in Family Financial Planning as well as a Certificate in Personal Financial Planning through Kansas State University.