When it comes to planning for your retirement and deciding on how much to contribute to your 401(k) account, there are several important factors to consider. Your age, financial situation, retirement goals, and the annual contribution limits set by the IRS all play a role in determining the right amount to save.
Here’s a breakdown of the key factors that can impact your 401(k) contribution:
Factors affecting your 401(k) contribution
Financial advisors often recommend contributing between 10 and 15 percent of your salary to your 401(k). However, the ideal percentage for you depends on:
- Your age: Starting to save early can have a significant impact on your retirement savings due to the power of compound interest. The closer you are to retirement, the more you may need to contribute to make up for lost time.
- Financial obligations: Consider your fixed expenses like loans, mortgage, and other bills when determining how much you can afford to save for retirement.
- Retirement goals: Think about the lifestyle you want in retirement and how much you’ll need to save to achieve those goals. Saving at least 80% of your pre-retirement income is a good starting point.
401(k) contribution limits
The IRS sets annual contribution limits for 401(k) accounts. For 2024, the limit is $23,000, with an additional $7,500 catch-up contribution for those aged 50 and older.
Employer matching contributions can also boost your savings. If your employer offers a match, try to contribute enough to maximize this benefit.
Consider tax implications
Decide whether to make pre-tax or after-tax contributions to your 401(k). Pre-tax contributions defer taxes until retirement, while after-tax contributions (Roth 401(k)) are taxed now but grow tax-free.
Automatic contribution increases
If you’re unable to save a large percentage of your income initially, consider setting up automatic increases in your contribution rate. This gradual approach can help you reach your savings goals over time.
Remember, your 401(k) is a valuable tool for building a secure retirement. Start saving early and stay consistent with your contributions to set yourself up for financial security in the future.
Editorial Disclaimer: It’s important to conduct your own research before making investment decisions. Past performance is not indicative of future results.