Broker Check

How Much Can I Contribute to My 401(k)? Better Question: How Much Should I Contribute to My 401(k)?

January 10, 2017

My clients are like an extension of my family, and I focus my energy on helping them get to a place where they are confident in their plan. So when I see study after study that says that Americans aren’t saving enough to reach their goals, it makes me think they can do better than that with just a basic education on what it would mean to invest more.

According to a year-end report by NerdWallet, only 29% of respondents were confident that they saved enough for retirement in 2016. And of those actually saving, only 32% plan to increase their contributions in 2017.

To put salt in the wound, a January 3 article in the Wall Street Journal titled “The Champions of the 401(k) Lament the Revolution They Started” outlines what a failure the 401(k) has been as a tool for Americans to plan for retirement. At all income levels, Americans are not investing enough, and it’s time to reverse that trend.

Let’s look at the math with a 45 year old, who has a $75,000 salary. Her company will match 50% of the first 6% that she contributes, so she currently contributes only 6%. That means she contributes $4,500 (6% of $75,000), and her company contributes $2,250 (50% of $4,500). After 20 years, at an invested return of 6%, she'll amass just over $250,000. Now let’s look at the difference she can make in her future with a small increase to her contribution. If she increases her contribution by 2% (just $1,500 each year), she will amass over $310,000 over the same time period. Note that her employer has not contributed any additional dollars, but she is $60,000 closer to her retirement goal.

If you are committed to maximizing your 401(k), 403(b), or 457(b) retirement plan contributions, the “under 50” amount remains at $18,000, and the “over 50” amount also remains at $24,000.

For those who can afford it, I recommend that employees consider investing at least as much as their employer requires for the maximum employer match. That way, you don't leave "free money" on the table. Beyond that, long-term investing should be focused on the investment that is most beneficial for the goal. That very well may be your retirement plan (401k, 403b, 457, etc.), or it may be another program. If you decide to invest in your retirement plan, you should look into whether the plan offers a Roth option. Your CPA can help you determine if the Roth or Traditional option is better for you, but the rule of thumb is that you should be in the lower tax brackets, and at least five years from retirement, for the Roth option to provide more tax benefit than the Traditional option.

The next step is to review your budget to figure out how you can afford to increase your contribution. When we give our clients the dollar amount that they need to contribute to their plans, our expectation is that it will help them arrive one day at the retirement that they envision. We also calculate the amount within the context of their other financial goals, making sure to prioritize according to their needs. If you need help finding this extra money in your budget, review my article on our MONEY Budgeting System.

As individual situations vary, the information presented here should only be relied upon when coordinated with individual professional advice.