If you’ve started saving for retirement, you probably know that 401(k)s are an important tool. But how much do you really need to save in your 401(k)? And will it be enough? There is no single answer—a lot depends on where you are in your career. But even if you get started later in life, 401(k)s offer savers advantages that can help set you up for a secure retirement.
About 72% of American workers have access to a 401(k) or similar tax-advantaged retirement account, according to research from the Investment Company Institute, an investment fund trade group. With a 401(k), money can be automatically deducted from every paycheck and invested in the stock market before Uncle Sam takes a bite. You don’t pay income taxes until you make withdrawals at age 59½ or later. Those are big advantages, and they can help a lot with the task you have in front of you: The average American expects to need nearly $1.3 million in retirement, according to one recent survey.
Contributing to a 401(k) is “kind of a no-brainer,” says Derek Pszenny, a financial advisor at Carolina Wealth Management in North Caroline. “You can put your money in there, you can pick your investments and you can leave it alone and let it ride.”The tricky part is often deciding how much of your paycheck to save. Here is how much you can contribute according to the law, plus how much experts say you should contribute at every stage of life—from kicking in anything you can manage when you are young to maxing out as you get older.
How much can you contribute to a 401(k) in 2024?
For 2024, most employees will be able to contribute up to $23,000 into their 401(k)s and catch-up contribution limits will remain the same.
If you’re 50 or older, you can add an extra $7,500 “catch-up” contribution either year.Many employers offer matching contributions, which kick in extra cash that you can invest for retirement and which don’t count toward this annual limit.
401(k) contribution limits 2024
| 2024 limit | |
|---|---|
| Maximum employee contribution | $23,000 |
| Catch-up contribution (for those 50 and older) | $7,500 |
IRS
Most 401(k) contributions, including employer matches, go into a pretax, or traditional, 401(k) account. You don’t pay income taxes until you make a withdrawal and your investments grow tax-free. Some employers offer a Roth 401(k), which is essentially the inverse—but more on that later.
Early career: Get the employer match
Most early-career professionals have yet to crunch the numbers on how much they need in the bank to retire. It is a personal and nuanced calculation because there is so much to consider, from life expectancy to future costs of living to how much you can collect from Social Security.
Don’t let those unknowns stop you from saving—especially if you work at a company with a 401(k) match.
Employer matching is the closest thing you can get to a freebie in investing. “You don’t want to leave that money on the table,” says certified financial planner Marcy Keckler, who leads advice teams at Ameriprise Financial. To ensure you’re getting the full benefit of a 401(k) match, find out your employer’s matching formula and the maximum they could contribute.
Say your employer offers a 100% match on up to 3% of employee compensation. With a salary of $100,000, for instance, your employer will add $1 to your account for every $1 you save, up to $3,000.
In a partial match scenario, your employer may contribute 25 cents or 50 cents for every $1 you save, up to a maximum percentage of your pay. (Here’s a calculator to check if you’re contributing enough to make the most of your match.)
Unlike older groups, many young workers have found themselves automatically enrolled in a 401(k) when they start a new job thanks to law changes. They can opt out of saving, but often don’t. It’s paying off, according to Vanguard, which estimates that millennials are on better track for retirement than older generations.
If you’re able to contribute more than what you need to get your employer match, Pszenny recommends choosing a 10% deferral rate as soon as you’re eligible for the company 401(k) plan (some employers require at least a year of service).
“I recommend the 10% number because I do think it’s attainable and I think it’s important that you have a goal that you can reach,” Pszenny says. Most young people can adapt well to living on 90% of their salary, he adds.
However, when choosing your deferral rate remember that, unlike money in a savings account, you can’t just make a withdrawal from your 401(k). You’ll generally owe a penalty and taxes if you pull money out before you turn 59½. Some 401(k) plans allow you to take a loan against your balance, but there are fees and interest payments to consider.
Still, an early commitment to saving for retirement is like “building a muscle,” says Keckler. “If you’re invested for the long term, you can generally expect that on average over time your investments are likely to grow.”
Mid career: Save 1% more each year
As you settle into this busy phase of life, it might feel difficult to stay on track with retirement savings. Perhaps you’re still paying student loans, and now you also have a mortgage, child care and vacations to budget for.
To avoid falling behind on retirement savings, Keckler suggests bumping up your 401(k) contribution by 1% of your salary every year, until you reach the annual maximum ($23,000 in 2024). In other words, if you are saving 5% of your salary, try increasing that to 6% next year and 7% the year after. If you are saving 10%, bump it to 11%.
“That is a great way to just put your increased savings on autopilot so you don’t have to think about it, you don’t have to recommit to it,” Keckler says, adding that many 401(k) plans have automatic escalation features that will make the annual adjustment for you.
Let’s say you save 5% of your $100,000 salary, or $208 per paycheck, starting at age 30. By 65, you could have about $720,000 in your 401(k), assuming a modest 7% annual return but not factoring in any potential salary increases or bonuses. If you bump up your contribution by 1% a year, however, stopping when you reach a 10% deferral rate but continuing to save until age 65, your nest egg could be worth $1.3 million.
If you keep saving an additional 1% each year until you max out your contribution at around 22% of your pay in your late 40s, you could have more than $2 million by retirement.If you get decent raises, consider allocating half of the increase toward your 401(k) and putting half toward other goals or expenses, Pszenny says. This approach can help you reach other financial goals, such as buying a new car or building an emergency fund, and reduces the risk of oversaving, a reality he says many of his high-net-worth clients face.
Late career: Max out and catch up
By age 50 or so, you should know your retirement savings target. That is, how much money you need invested by the time you retire to generate income for the rest of your life. Pick your favorite guideline, such as the 4% rule, and crunch the numbers with the help of an online retirement calculator, or consult a financial advisor.
Because 401(k)s let you save more each year than any other retirement account, and offer a hefty tax break, many experts recommend contributing the IRS maximum if you can afford to.
“Let’s say you hit 50 and you’re kind of behind the eight ball and you didn’t save enough,” Pszenny says. Now that you’re eligible for the catch-up contribution, you can add a total of $30,500 to your 401(k) this year.
By the time you reach age 67 (the full retirement age for people born in 1960 or later), those additions to your 401(k) could grow to well over $1 million if you’re invested in an 80/20 split of stocks and bonds, Pszenny says.
What if I can save more than the max 401(k) contribution?
If you’re in a position to save more than 401(k) rules allow, you can invest up to $7,000 a year—plus $1,000 extra if you’re at least 50 years old—in traditional and Roth IRAs. (The limit, like with 401(k)s, is combined, not per account.) If you left a job with a 401(k), you may already have a rollover IRA.
Note that you can only contribute to a Roth IRA in 2024 if you make less than $161,000 as a single tax filer or less than $240,000 as a married couple. Traditional IRAs have no income cap to contribute, but you may not get an immediate tax deduction if you make more than $87,000 or $143,000 as a couple.
IRAs aren’t sponsored by employers and tend to offer far more investment options than 401(k)s, such as individual stocks and bonds and real-estate investment trusts. Roth IRAs also don’t require annual distributions when you reach a certain age, making them a great tool for gifting wealth to children or grandchildren, sometimes with no tax consequences.
Should I contribute to a traditional 401(k) or a Roth 401(k)?
A Roth 401(k), like a Roth IRA, is funded with posttax dollars, so you pay taxes now but no taxes are due when you take your contributions from the account. You avoid taxes on your investment earnings if you meet certain conditions, such as waiting to withdraw earnings until age 59 and a half or using them to buy your first house.
Choosing which account to use for retirement savings means considering the personal benefits of paying taxes today versus having tax freedom in the future, Keckler says. If you can, use a combination of traditional and Roth accounts so that you have some tax flexibility in retirement.
In general, it makes sense to contribute to a Roth account when you have low or moderate income. As your income increases, consider shifting to pretax contributions as a way to reduce taxes while you’re still working.
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More on retirement savings
- How Does 401(k) Matching Work?
- I Just Left My Old Job. Do I Need to Roll Over My 401(k) or Can I Just Leave It Alone
- How Much Should I Have in Savings?
Meet the contributor
Tanza Loudenback
Tanza Loudenback is a contributor to Buy Side from WSJ.
