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How Much Should You Contribute To 401k Plan?

It’s the question that seemingly drives the entire investment industry -- how much should I contribute to my 401(k) account?

There are loads of answers out there on the Internet. Investment advisors will say “as much as you can!” Even people with absolutely nothing to gain from your decision will likely say something like “lots. Save lots and lots and lots.”

Here at MyBankTracker, we have a similarly vague and unhelpful answer: “It depends.”

Why It Depends

Putting money into a 401(k) plan will result in two things: less money now and, one hopes, more money later.

So when calculating how much to contribute to your 401(k), you need to figure out just how much money you can put away and how much you’ll need when you retire.

The simplest way to do this is by using one of the myriad calculators available on the Web.

Myriad Calculators

By entering your age, the amount of your present savings, and your annual salary, the calculator will tell you how much you need to put aside in pre-tax income in order to eventually retire with a monthly check that is 80% of what you make now.

Simple, huh?

If you’re young, life is good. Use the calculator and you’ll find that the suggested retirement amount is quite low. So start saving.

If you’re older and haven’t saved much, you may find that the suggested amount is more than you can swing, given your present expenses.

In that case, you only have two options: cut expenses now, or plan on living on less than 80% of your present income in the future.

Get an IRA

Making things much tougher is that there are limits to how much the government will let you put into a 401(k) plan every year. Fortunately, there are some additional options, like IRAs. If you’re eligible, plan on maxing out those contributions too.

Another way to look at this is to realize that there are only four possible scenarios when you consider retirement -- you’re either young enough not to worry; rich enough not to worry; on your way to rich enough not to worry; or in trouble.

Figure out which scenario fits you now and act accordingly.

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