We understand that saving isn't always easy. Thanks to day-to-day living expenses and that occasional, inevitable, or unexpected big expense like a car repair or a leaky roof many people have no shortage of ways to use their monthly income.
But the good news, as our 401(k) advisors will tell you, is that even if it doesn't seem like a lot, putting those extra dollars away for retirement can make a big difference over time. Any amount is good place to start, but with your long term goals in mind how much is the right amount to contribute to your 401(k)? While the particulars of the answer vary from investor to investor, one overall response holds true: As much as you can.
401(k) Advisors: Force Yourself To Save
A 2014 report from Vanguard entitled How America Saves indicates that the average 401k plan balance was just over $101,000 -- that's an 80 percent increase in over the last six years! However, following a 4 percent "safe withdrawal" rule, that $101,000 balance provides.... just $4,000 per year. These figures underscore the importance of building that balance throughout your working years, even if you can only afford to save a little bit.
Taking into consideration that the pension account is almost extinct, the need to fund your own retirement is paramount. That's why, even if it seems next to impossible, you must force yourself to save -- even if that means starting with a 5 percent contribution.
Fortunately, the federal government makes saving through an employer-sponsored plan more attractive by allowing you to save with pre-tax dollars. That means your investments will grow without tax consequences until you start making withdrawals. The earliest you can start withdrawing without incurring penalties is age 59 1/2, and you must start withdrawing by age 70 1/2 unless you want to face penalties.
Financial Strategies: Employer Match and Other 401(k) Builders
In addition to preferred tax treatments, many employer-sponsored 401(k) programs also offer employer matches -- and you definitely want to take advantage of this benefit. Many employers will match a certain percentage of your contributions to your savings plan and if possible you should take full advantage of this offer. Even if you feel like you really can't afford it, you should do your best to contribute the maximum that your employer will match. If you don't, it's essentially saying "no thank you" to free money.
As a general rule, contribute at least up to the employer match level. Then, over time, continue to increase your savings. While it may be difficult to focus on saving for retirement when you're a worker in your 20s or 30s, make the effort to imagine yourself elderly and retired -- and then use that emotional connection with your future self to shape your comprehensive financial plan. Your goal? To get to a 10 to 12 percent contribution rate.
In 2015, you can contribute up to $18,000 to your 401(k); if you're over age 50, you are allowed to contribute up to $24,000 in order to "catch up." Be sure to keep your eye on fees and expenses associated with the plan, too; if your 401(k) fees seem high, talk to your employer about other options.
But most importantly, save all that you can in your 401(k) now. Your future (retired) self will thank you one day.