As of 2014, the most that the Internal Revenue Service will let you put into a 401(k) is $17,500 annually, although when you turn 50, you may be able to make extra catch-up payments. The right amount to put into your 401(k) varies based on your salary and on your goals for retirement. Your employer's policies also play a role in how much you should contribute.
Maximizing Your Match
If possible, put at least enough money in your 401(k) as your employer will match. For example, if your employer matches half of what you put in up to the first 5 percent of your salary, putting in 5 percent results in a 7.5-percent total contribution to your 401(k) account. The money that your employer puts in is free to you, so you want to get as much of it as you can. If you can't afford to contribute the full match amount, put in as much as you can and increase the amount each time you get a raise.
What You Need
The amount you should invest is directly related to how much money you will need in retirement. If you hope to someday retire and travel the world with a lavish lifestyle, you will need more money than if you plan to live quietly in a paid-off house. Even if you assume that you won't need much money, inflation means that the lifestyle you could enjoy on $3,000 or $4,000 per month today might cost $9,000 or more per month by the time you're ready to retire.
How Much to Save
When you start saving affects how much you need to save. If you start saving at age 25 and want to retire at 67, $160 per month in savings every month will generate $1,000 per month in retirement income at a reasonable rate of return. Whenever you start saving, you will find that putting away 10 to 15 percent of your income is frequently advised.
Beyond the 401(k)
If you can't save 10 to 15 percent of your income in your 401(k) because your employer's plan doesn't allow it, you can use other plans to save. You might be eligible to save for retirement in an individual retirement account or you could use taxable accounts. If you need to free up funds to contribute to private accounts, one way is to spend less. Another is to add a second job or side work. Upgrading your skills results in higher pay. Ultimately, if you do not save enough to fund your retirement, you will either have to work longer or retire with less income.
For example, imagine that you make $35,000 per year and choose to put away 6 percent of your salary with your employer who matches 50 percent match of your contribution. In your first year, you'd put away $3,150 -- $2,100 of your money and $1,050 of your employer's. If you continue saving for 35 years, receive 3-percent raises every year and invest your money at an average rate of return of 9 percent, you would have just under $1.05 million after 35 years. At a withdrawal rate of 4 percent per year, you'd be able to pull out roughly $42,000 per year in retirement. Remember, though, that $42,000 probably won't buy as much in 35 years as it does today.
- Jupiterimages/Photos.com/Getty Images
- How Do Simple & Compound Interest Affect Investment?
- How to Borrow Against Your Investments
- Are Condos with High HOAs Bad Investments?
- How to Invest 20K
- How Can Smaller Investors Obtain Access to Private Equity Investment?
- How to Determine Weights in an Investment Portfolio
- How to Find the Net Income on a Statement of Owner's Equity
- The Advantages of Commodity Investments
- How to Make an Investment Portfolio More Conservative With Asset Allocation
- The Advantages of Equity Portfolio Investments