A 401(k) is an easy, accessible plan that many take advantage of to save for retirement. Your employer deducts your contributions from your pay and very often matches them up to a certain percentage. If the amount you contribute is small enough, you probably won’t even miss the money. But if that’s your only method of saving for retirement, you'll need to consider whether you are adding enough money to your retirement savings account. According to Fidelity, the rule of thumb is that you’ll need about eight times your annual salary to ensure you don’t run out of money in 25 years of retirement.
Meet Employer’s Match at Minimum
When employers match your 401(k) contribution, it serves as the company’s pension plan. Some look at it like free money, but it’s actually a benefit you earn by working for your employer. At the very least, you should contribute the maximum amount to your 401(k) that your employer is willing to match. If, for example, your company matches the first 5 percent of the money you contribute, defer 5 percent of your salary to your retirement account. And, don’t leave money on the table when you leave the job or retire.
Save Enough to Provide Sufficient Income
Having an additional $1,000 on top of your Social Security payment each month could ensure a reasonably comfortable retirement. In the following hypothetical example: If you plan to retire at age 67 and end up living to age 93, you will need to put about $160 in your 401(k) account every month ($40 per week), starting when you’re 25 and earning an average 5.5 percent on your investment. If you earn $400 a week, saving 10 percent will cover it, 5 percent if you make $800 a week. The amounts increase if you’re starting out later in life. You’ll need to save $67.50 per week if you start at age 35 and $125 per week if you’re just starting a 401(k) at age 45.
Without Hurting Your Budget
A 401(k) is an effective way to save for retirement because the money is deducted from your salary before taxes are taken out. You don’t pay taxes on the money until you retire, when your income typically puts you in a lower tax bracket. You don’t want to put so much into the account that you can’t meet your monthly obligations, but you should put in as much as you can afford. In 2013 and 2014, the maximum allowed by the IRS was $17,500. The maximum allowable contribution equates to about $337 per week.
Set Regular Increases
As your income increases, so should the percentage of your contribution. Talk to your plan administrator about building in an automatic percentage increase in your 401(k) contribution rate each year. For example, start with the company match, say 3 percent, and increase it to 4 percent the next year, 5 percent in year three and so forth. While you receive bonuses, cost-of-living increases and pay raises, you will barely notice the effect a small increase in your contribution percentage has on your paycheck each year. A 1 percentage point increase each year may barely make a dent in your earnings now, but it will make a significant impression on your retirement account and, subsequently, your lifestyle in retirement.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."