Your 401(k): What’s the Ideal Contribution?

No matter your age, you probably have a lot of questions and concerns about saving for retirement. How to save for it, what options are available, and—most importantly—how much money should you be socking away?

One of the most common ways to start saving for retirement is through an employer-sponsored 401(k) plan. Many companies offer them, and for many employees, this is their sole retirement savings account. But with so many options, unfamiliar terms, stipulations, and rules, 401(k)s can be mystifying even to financially-savvy savers.

Contribution Limits

First, it’s important to know that the Internal Revenue Service (IRS) sets annual limits on contributions. The elective deferral (contribution) limit for employees who participate in a 401(k) (or in a 403(b), most 457 plans, and the federal government’s Thrift Savings Plan) is $19,500 for tax years 2020 and 2021, up from $19,000 for 2019. 

There’s a catch-up contribution for employees age 50 and over who participate in any of these plans. It allows for an additional $6,500 contribution in 2020 and 2021 and $6,000 in 2019.

Don’t Forget the Match

Of course, every person’s answer to this question depends on individual retirement goals, existing resources, lifestyle, and family decisions, but a common rule of thumb is to set aside at least 10% of your gross earnings as a start.

In any case, if your company offers a 401(k) matching contribution, you should put in at least enough to get the maximum amount. A typical match might be 3% of salary or 50% of the first 6% of the employee contribution.

It’s free money, so be sure to check if your plan has a match and contribute at least enough to get all of it. You can always ramp up or scale back your contribution later.

“There is no ideal contribution to a 401(k) plan unless there is a company match. You should always take full advantage of a company match because it is essentially free money that the company gives you,” notes Arie Korving, a financial advisor with Koving & Company in Suffolk, Va.

Many plans require a 6% deferral to get the full match, and many savers stop there. That may be enough for those who expect to have other resources, but for most, it probably won’t be.

If you start early enough, given the time your money has to grow, 10% may add up to a very nice nest egg, especially as your salary increases over time.

Take Note, Older Savers

If you start saving later in life, especially when you’re in your 50s, you may need to increase your contribution amount to make up for lost time.

Luckily, late savers are generally in their peak earning years. And, from age 50, they have a greater opportunity to save. As noted above, the 2021 limit on catch-up contributions is $6,500 for individuals who are age 50 or older on any day of that calendar year.

If you turn 50 on or before Dec. 31, 2021, for example, you can contribute an additional $6,500 above the $19,500 401(k) contribution limit for the year for a total of $26,000.

“As far as an ‘ideal’ contribution is concerned, that depends on many variables,” says Dave Rowan, a financial advisor with Rowan Financial in Bethlehem, Pa. “Perhaps the biggest is your age. If you begin saving in your 20s, then 10% is generally sufficient to fund a decent retirement. However, if you’re in your 50s and just getting started, you’ll likely need to save more than that.”

The More the Better

There are many variables to consider when thinking about that ideal amount for retirement. Are you married? Is your spouse employed? How much can you expect from Social Security benefits? 

Retirement age calls for a certain amount of comfort, but that also is different for every individual. Will you spend your time gardening at home, traveling abroad, starting a new business, or riding a motorcycle cross-country?

And then there are the unknowns. Chief among them is this question: Will health problems lead to big, unexpected bills? 

However, regardless of your age and expectations, most financial advisors agree that 10% to 20% of your salary is a good amount to contribute toward your retirement fund.

For those who want to go even further, there are several options, such as traditional IRAs and Roth IRAs. (The limit on IRA contributions for tax years 2020 and 2021 is $6,000, with a $1,000 catch-up contribution for those age 50 or older.)

“The ideal contribution rate for retirement depends on a few different factors,” says Mark Hebner of Index Fund Advisors in Irvine, Calif., “but a good sweet spot is 10% to 15%—more towards 15% if you can afford to do so. The bare minimum is 10%.”

“If you can, you should move closer to a 20% contribution to your retirement plan and keep that amount as your salary increases,” suggests Nickolas R. Strain, a financial advisor with Halbert Hargrove in Long Beach, California. He adds:

Most financial planning studies suggest that the ideal contribution percentage to save for retirement is between 15% and 20% of gross income. These contributions could be made into a 401(k) plan, 401(k) match received from an employer, IRA, Roth IRA, and/or taxable accounts. As your income grows, it is important to continue to save 15% to 20% of it so that you can invest the funds and grow your investments until you need to start taking distributions in retirement.

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