How Much Should You Really BE Contributing to Your 401(k)?

When you think of retirement, it can feel like a lifetime away. That’s why at The Financial Gym, we often call your retirement funds your “moon money”. Just like the moon, it is very far away but it’s always in sight. You also want your retirement funds to be as easy to access as the moon — so not easy to touch! This is your future at stake after all. One of the best retirement vehicles to get started with is your employer-sponsored 401(k). But is there a 401(k) contribution strategy that you should be following? How much should you really be contributing to your 401(k) anyway? Let us break it down.

Do you get a 401(k) match?

Many employers, but not all, offer a 401(k) match. For example, your employer might match every dollar you save in your 401(k) up to 3 percent. Taking advantage of the 401(k) match will score you a cool six percent contribution which can help boost your retirement savings.

If you are eligible for a 401(k) match you absolutely should save up to the percentage match at the very least. Why? If you don’t, you’re leaving money on the table and not taking advantage of all of your employee benefits.

When you work at a job, there are other perks aside from your salary that make it worth it to work there. These benefits include health insurance typically and a 401(k) match. Not taking advantage of the match is essentially lowering your salary in a way.

So take the free money and contribute up to the match! This is an essential part of a great 401(k) contribution strategy. Your future self will thank you later.

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When do you want to retire?

It used to be that you’d work for the same company for 30 years, retire when you were 65 and be set. Well, that reality has not been reality for quite some time.

Millennials job hop every few years and are dealing with student loan debt and stagnant wages. You might be saving for retirement later. Even so, you want to be clear on your goals.

So, think about your big, wild, audacious dreams — when do you want to retire? Do you see yourself retiring later in life or do you see yourself on the FIRE bandwagon (financial independence, retire early)?

When you have an idea in mind of when you’d like to retire, you can reverse engineer the process and calculate how much you will need to save to reach your goal. This way how much you save is based on your personal goals and lifestyle and not just a generic number.

A benchmark for 401(k) contributions

It’s hard to give out retirement advice without knowing your age, income, lifestyle, etc. A 40-year old should not save the same amount as a 20-year old. But when it comes to benchmarks for 401(k) contributions many personal finance experts recommend saving 10 to 15 percent of your income for retirement.

But if you can easily do more and it aligns with your goals, challenge yourself to get financially strong and save even more for retirement. Just like going to the gym, the key with saving for retirement is consistency. Even if you have to change up the percentage every now and again, you want to be contributing something every month.

You also want to be clear on what type of 401(k) you have and how it will affect your tax situation. Most people have a traditional 401(k) where contributions are made before taxes. This reduces your adjusted gross income now, so you may pay less taxes now but get taxed in retirement. If you opt for a Roth 401(k), your contributions are made after taxes, so you will not end up paying taxes in retirement.

401(k) contribution limits

Your 401(k) contribution strategy should be personalized to your goals and your lifestyle. But even if you want to hoard cash like there’s no tomorrow, there are actually 401(k) contribution limits.

The IRS is boosting 401(k) contribution limits from $18,500 to $19,000 for 2019. The Roth 401(k) contributions limits are the same as a Traditional 401(k) for 2019. In other words, you can save any amount up to $19,000 in your Traditional 401(k) or Roth 401(k) for 2019. If you want to be a financial superstar and you can afford it, consider maxing out your 401(k) up to the limit.

I mean, you’re not going to reach retirement and think “I wish I saved less!”

Funding your 401(k)

Thinking about your strategy or even looking at the basic benchmarks for your retirement savings can feel overwhelming. Where in the heck are you supposed to get that money?

First, you want to dive into your expenses. Start by tracking your spending for a month to see where you’re at.

What can you cut back on or ditch altogether? If it’s not bringing a ton of value to your life, if it’s not bringing joy or making your life easier, say goodbye to that expense.

On top of lowering your expenses and freeing up some money, you also want to focus on earning more through negotiation and side hustling. Nothing that is worth it comes easy and that includes funding the retirement of your dreams.

Own your 401(k) strategy

It’s your money, it’s your life, and it’s your retirement. You are your best money advocate (or  your BFF, best financial friend at the Gym is!) so it’s important to create a 401(k) strategy that works for you and your goals.

Caitlin Lyttle