When it comes to saving, the more is always the better thus ‘how much should I contribute to my 401k’ is a question difficult to answer. This may make it challenging to decide how much should you invest in your retirement via a 401k plan, especially for the first-timers. Further, no two individuals in the world are the same; the employers, monthly incomes and the expenses vary. So, it is impossible to come with an amount that everyone can stick to. However, keeping in mind the following factors can help you decide the amount that will be apt for you.
Factors Deciding How Much to Save in 401k Plan?
Opening a 401k plan has enough potential to decide how you lead your retired life. This makes it important to evaluate all the factors that might affect the amount that you want to invest. These include:
The age at which you start a 401k plan, plays a decisive rule while picking out the amount that you want to save. For example:
- If you decide to start saving in the twenties you might already be paying off your student loans but it gives you the freedom to experiment more. Since you will be investing for the longer term you may go for investing lesser amount on high-risk markets that offer bigger returns due to the risk factor.
- The Thirties is the time everyone can surely start about investing as the majority of people have finished paying off their loans by this time. This makes it easier to evaluate all your expenses and choose the amount that you want to invest
- People who start a 401k plan between the 40s- 50s have to carefully pick the amount that they want to invest. While you probably have to go for higher contribution don’t try to cover up for the missed time by investing hefty amount and in risky stocks.
- There are flexible rules in the 401k plan that let the people over the 60’s who start a 401k plan cover-up for those missed years by letting them contribute more than the permissible limits for other people. You also get to choose when do you want to start receiving your social security at this point of your life so choose wisely.
Taxes – The Pre or Post Tax Contributions
Another important factor that needs must be carefully evaluated is if you want to opt for pre-tax or post-tax contribution. In the pre-tax, you will only have to pay the taxes for the withdrawals that you make which makes it a better option, but if have a large amount in the task differed bracket it may turn against you. On the other hand, the taxes if you opt for post-tax contribution, the tax is only applicable to the profit that you gain.
How Much To Save in 401k Plan?
Well, this ain’t easy to answer since this may vary for each individual. Yet it can get a lot easier to decide if you keep the following points in your mind while choosing how much would you like to save for your retirement.
The Thumb Rule
Although the thumb rule is that at least 10% of all your salary should go into saving. Yet if you decide to stick to this, don’t forget to keep the factors like your student’s loans or other expenses.
There are limits on how much salary deferral can you opt for. These are decided by the Internal Revenue System IRS which sets new limits for each year. So don’t forget to check the contribution of that financial year in which you want to start investing. This may differ each year like it is higher in 2020 – $19500 than in 2019 which was $19000.
This is the freebie that you get for opting for a 401k plan, your employer also contributes a certain match on the amount that you deposit. This could be anything from 5% – 6% and go up to 25%. Needless to say, try to take as much advantage you can and make the most for it. Try to get hold of the maximum match that your employer has to offer.