How Much Should I Contribute to My 401(k)?

The employer-sponsored 401(k) has largely replaced the company-funded pension plan as the primary source of retirement savings for most Americans. Unlike a pension, however, 401(k) benefits are not automatic. Employees must choose whether or not to participate and then decide how much to contribute and how to best invest their contributions.

One of the most important decisions you can make is how much of your earnings to contribute to your 401(k). While the answer to this question depends on your retirement goals, timeframe and income, there are some general guidelines to keep in mind.

Where to Start

Many experts agree that while anything is better than nothing, most workers should shoot for contributing at least 10% of their income to a retirement plan. It’s particularly important to invest enough to take full advantage of any matching contributions that your employer offers.

A matching contribution refers to any money that your employer adds to your retirement account that’s contingent on your own contributions. Sometimes, this is a dollar-for-dollar match. Other times, it may be $.50 on the dollar or some other percentage up to a given amount. Whatever the formula for your company’s match, you should try to invest enough to earn the maximum match offered. This is because the company match is essentially “free money” — and you won’t find a better deal than that anywhere in the investment universe.

Raise the Bar

Once you’re investing enough to benefit from the maximum company match and have gotten your contribution rate up to 10%, challenge yourself to raise the level even higher. Many experts recommend contributing 15% to 20%. If you start investing from the beginning, those early contributions have the greatest potential to grow.

Automate Contributions

Some companies offer automatic acceleration programs that gradually increase the amount of your contributions over time. Speak with your HR or benefits department to see if you can enroll. By making contributions and increases automatic, you can improve your chances of staying on track to fund a comfortable retirement for yourself.

While you may feel it’s challenging to put money aside from your paycheck, many workers find that automatic deductions allow them to acclimate their budgets relatively easily. And if you make it a habit to raise your contributions every time you get a pay raise, you’re less likely to feel like you’re taking a hit.

What If?

If you’re worried about committing to those contributions with each paycheck, don’t be. You can always stop or reduce them. Just because you set the contribution level at 15%, that doesn’t mean you have to keep it there. You may be able to change your contributions online or through your benefits department.

Contributing regularly to your 401(k) can be one of the most important things you do to prepare for a secure retirement. But it’s important to start early and contribute sufficiently to meet your goals. It can be extremely helpful to speak with a qualified financial advisor to help determine what makes sense for you.