How much should you save in your 401(k) plan? As much as you can seems like a pretty good answer. Of course, life isn’t that simple. Saving as much as possible is a laudable goal, but it doesn’t exactly qualify as planning. To make sure you’re on track for retirement, you should have an idea of how much you need to set aside to reach your retirement goal.
Know Your Limits
Before you start coming up with an annual savings target, it’s important to understand how much you’re allowed to contribute to a 401(k) plan. In 2015 and 2016, workers younger than 50 can save $18,000 in a 401(k), 403(b), or similar plan, while those age 50 or older can save $24,000 annually, an extra $6,000 per year.
Those contribution limits apply to tax-deductible 401(k) contributions. Some plans may allow you to make after-tax contributions above and beyond that amount. The total limit on contributions (a combination of what you save and what your employer contributes on your behalf) is $53,000 annually for individuals under 50 and $59,000 annually for those ages 50 or older.
Contribution limits often go up slightly every year (they increased from $17,500 in 2014 to $18,000 in 2015); so if you’re an aggressive saver, you’ll also want to adjust accordingly.
At a Minimum, Get Your Match
The first rule of 401(k) plans is to save enough to get your full employer match. You’ve probably heard it before, but not contributing enough to get your employer’s matching contributions is like leaving free money on the table. Even if you’re not impressed with your company’s 401(k) plan and would prefer to save in some other way, it still makes sense to at least get the match.
But How Much Do I Really Need?
So you know how much the government will let you save and that you should be contributing enough to get your employer match. But how much should you be setting aside to prepare yourself for a comfortable retirement? That’s the ultimate question.
Unfortunately, there’s no magic number, because every individual situation is different. People have different tolerances for risk, market performance varies over time, and everyone has their own idea of an ideal retirement. That’s why it’s best to talk to a financial advisor who can help you determine how much you need. In the meantime, there are a few rules of thumb that may help you get a sense of where you stand.
Some experts use a simple formula based on your age and salary to give people a rough idea of how much they’ll need to save. Here it is:
- By age 35, your savings should total at least your annual salary.
- By age 45, your savings should total at least three times your annual salary.
- By age 55, your savings should total at least five times your annual salary.
- By age 67, your savings should total at least eight times your annual salary.
In other words, if you earn $75,000 a year at age 35, you should have at least that much saved in your 401(k) and other retirement accounts. If your salary hits $125,000 annually by age 67, you’ll need $1 million. But if you’re earning less at age 67 — say $80,000 a year — $640,000 might be enough. Also keep in mind you’ll need to make sure your spouse is saving enough for retirement if you’re married.
Another guideline suggests saving a certain percentage of your salary every year for retirement. Between 10% and 15% is usually the recommended number. If you started saving when you were young, your target savings percentage is usually lower; but if you procrastinated, you’re more likely to be looking at having to save 15% or even 20% of your pay to get you on track to a comfortable retirement. The good news is your employer match counts in that number, so if your goal is to save 10% and your employer match is 5%, you only need to save an additional 5% of your pay to reach that 20% total.
Again, these retirement savings rules are only guidelines. To really find out how much you need to save in your 401(k) plan and other retirement accounts, please feel free to call and discuss this in more detail.