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How much should I contribute to my 401(k)?
401(k) Saving for your retirement Retirement wellness

How much should I contribute to my 401(k)?

Nicolle Willson, J.D., CFP®, C(k)P®

So your employer offers a 401(k) and you’ve taken the great first step towards setting up an account and contributing. But now you’re wondering if you should simply set it and forget it, or if it’d be wise to increase your contributions every once in a while.

No matter your current financial situation, here are some key things to consider when figuring out how much to contribute to your 401k.  

Know your limits

In 2022, individuals can contribute up to $20,500 between their traditional and Roth accounts. If you’re 50 or older, you can contribute an additional $6,500 ($27,000 in total). If you are at the point where you are able to contribute the maximum amount, you’re off to an excellent start. You should note that the IRS typically increases the maximum limit every year.

Traditional Contributions vs Roth Contributions

Is there an employer match?

If your company matches, consider contributing at least enough to receive the full match amount, if you’re able to afford it. Here’s an example of what that might look like:

If your company has a 100% up to 5% match, that means they will match you dollar for dollar, up to 5% of your pay that you deposit into your 401(k) account. If you make $100,000, you will need to contribute at least $5,000 to get the maximum match of $5,000 annually.

If you don’t contribute at least $5,000, you will be leaving money on the table that otherwise would have been yours. Keep aware of any increases your company may make to their matching contributions so you can adjust your contributions accordingly if you’d like.

Start lower and increase later

If you find that you can’t contribute as much as you think you will need because of your living expenses or debts, figure out what you can contribute. Start by making a budget.

Separate out your necessary expenses (e.g. rent, utilities, groceries) from your discretionary expenses (e.g. dining out, entertainment) and see where you can decrease your discretionary spending. Based on your budget, look to contribute as much as you feel comfortable with.

Think about increasing your contributions later on, consider doing so when you get a raise, a promotion, or on a set periodic basis. The important thing is to start saving as early as possible. And if circumstances change, you can update your contribution rate at any time.

401(k) contributions and market volatility

During a market downturn, it’s important to take a step back, and recognize that when saving in your 401(k), you are investing for the long-term. Even though you might be afraid of investing in a volatile market, we believe it’s a good idea to continue to contribute to your 401(k).

Putting money into your 401(k) each pay period is a natural way to “dollar cost average,” which is a strategy where you invest a fixed dollar amount of money at regular intervals, over a long period of time. This means you won’t invest all your money into the market when it is either at a low or a high.

Of course, when the market stumbles, it can mean the economy isn’t doing well, so it’s important to reassess the personal impact on your budget and expenses too. You should take a look at your whole financial picture to strategize how you can continue to save, and continue your regular 401(k) contributions to smooth out your returns over time.

Additional factors to consider

When determining how much to contribute, here are some factors you should consider:

  • Overall risk tolerance
  • Investment objective
  • Overall financial situation
  • Outside investment and retirement accounts
  • Prior investment experience
  • Tax bracket
  • Time horizon

And finally, remember that this information is solely for educational purposes only and is not intended to be construed as tax or investment advice. You should consult a professional investment advisor to determine the investment strategy that fits your specific needs.

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