Your company’s retirement plan is just one of a collection of useful tools for successful retirement planning. As is the case with any tool, you have to use it for it to work. Creating a future of financial security in retirement can help decrease anxiety and stress around leaving the workforce, which can benefit not only your health, but your overall experience as a retiree. Instead of buying the latest gadget or planning a vacation, consider thinking about the future by looking at what you can do to increase your financial stability in retirement.
A financially secure retirement may look slightly different from person to person, depending on your lifestyle and spending habits—but some common goals include:
- Being debt-free
- Setting a realistic and comfortable monthly budget
- Having savings to cover any bills and expenses
- Spending time enjoying life instead of working
Regardless of your individual goals, education and saving more, earlier, is key to getting on the right track.
Why consider saving more in your retirement plan?
Of course, there are a million excuses you can use to put off saving for retirement, but there are multiple reasons to increase your contributions to your employer-sponsored 401(k), IRA, 403(b), etc. if you have the chance.
Saving more reduces your taxable income
Paying taxes is unavoidable, but you can postpone paying tax on income that you send directly to your tax-deferred, employer-sponsored retirement plan. Pre-tax dollars that you contribute to your plan are taken directly from your gross salary and invested so they can grow throughout your career. With pre-tax contributions, you’ll pay taxes on the money only when you make withdrawals from your account in retirement—but any accumulated interest on the investments isn’t be taxed until distribution as well. So, not only can you benefit from paying lower income taxes during the years you’re saving, but the pre-tax money you invest in your retirement plan can grow over time and result in a larger savings account to use for living comfortably in retirement. Making your contribution with Roth after-tax contributions? You still save on taxes—just when you make a withdrawal instead—because earnings are not taxable for qualified Roth distributions.
Employer matching contributions can help snowball your savings
Employers often choose to match your contributions to your retirement plan as a part of your benefits package. It can come in the form of a match up to a certain percentage of your salary or a flat contribution of a certain percentage of your salary. If your employer is offering to match up to a specific percentage of your pay in a retirement account, you should try to increase your annual contribution rate to at least that percentage. Otherwise, you may be leaving free money on the table that could have benefited your plan for financial security in retirement. Experts suggest that you save 10-15 percent of your annual income, but any money going into your retirement savings is better than none. Take a look at your employer’s benefits package to find out if and how much they’ll contribute to your retirement account on your behalf. Then, consider making the necessary changes to increase your contribution to make sure you are taking advantage of any retirement planning benefits offered by your employer.
You might also be interested in: Five things you need to know if you are saving in a 401(k)
Social Security income likely won't cover all your expenses in retirement
Many who decide to postpone saving for retirement are looking forward to using Social Security income as a replacement for their income. However, your Social Security benefit only replaces an average of approximately 40 percent of your annual income. Depending on your healthcare needs and general lifestyle expenses, this could leave you in a tough position, so it may be in your best interest to increase your savings in an employer-sponsored 401(k). While it’s advisable to try and decrease your expenses in retirement, increasing your retirement plan contributions throughout your career can be a beneficial way to boost your savings and set yourself up for financial security after you exit the workforce.
Planning for a financially secure and comfortable retirement
You may be following all of the "best practices" for retirement planning, but it’s important to remember that both your retirement plan and your needs are unique. Your circ*mstances and requirements may differ from the average person’s, and because of that, it’s important to review your contributions and retirement goals on a regular basis.
Increasing your contributions every year is one of many simple ways to boost your retirement savings. Making any other necessary changes as your needs and life goals change can help set you up for the ideal retirement you’ve been working so hard to achieve.
Check out our Retirement Saving Resources for additional information on preparing for a financially-secure future.
FAQs
Increasing your contributions every year is one of many simple ways to boost your retirement savings. Making any other necessary changes as your needs and life goals change can help set you up for the ideal retirement you've been working so hard to achieve.
Is it a good idea to increase 401(k) contribution? ›
Ramp up your retirement savings
Increasing your 401(k) contributions whenever your salary goes up can help you make progress in pursuit of your retirement goals. And it may also pay off to contribute to the other accounts and retirement saving options available to you.
Is it good to put more money in a 401k? ›
The money that you contribute to a 401(k) in your 20s will have the longest time to grow and earn compound interest. Aim to contribute as much as you are able to, up to the limit announced by the IRS. (For 2024, that limit is $23,000 for workers under 50 years old.) If you can't afford that, put in whatever you can.
Will increasing my 401k deduction help me? ›
Even a 1% annual increase in your retirement savings could mean thousands of dollars decades later, thanks to compound interest and time in the market. By increasing your 401(k) contributions now, you can give your money more time for potential growth and help put yourself on a path to a more secure financial future.
Should I increase my 401k contribution when the market is down? ›
One of the best things to do during a stock market crash or a low financial point is to stay the course and not reduce your 401(k) contributions. In fact, some believe a bear market is the right time to increase the percentage of income you funnel into your savings if you can afford it.
Will my taxes go down if I increase my 401k contribution? ›
Contribute as much as you can to your retirement plan
Contributions to these plans may be made pretax, which means they will reduce the amount of your income that is subject to tax for this year. Most employers will allow you to have the money automatically come out of your paycheck each month before you even see it.
How much should a 40 year old have in a 401k? ›
Fidelity says by age 40, aim to have a multiple of three times your salary saved up. That means if you're earning $75,000, your retirement account balance should be around $225,000 when you turn 40. If your employer offers both a traditional and Roth 401(k), you might want to divide your savings between the two.
How often should I increase my 401k contribution? ›
Your circ*mstances and requirements may differ from the average person's, and because of that, it's important to review your contributions and retirement goals on a regular basis. Increasing your contributions every year is one of many simple ways to boost your retirement savings.
What is the best amount to contribute to 401k? ›
Aim to save at least 15% of your pretax income each year for retirement (including employer contributions). This can be in a 401(k) or another retirement account. Contributing early can help you get the most out of your 401(K).
Are 401ks worth it anymore? ›
The value of 401(k) plans is based on the concept of dollar-cost averaging, but that's not always a reliable theory. Many 401(k) plans are expensive because of high administrative and record-keeping costs. Nonetheless, 401(k) plans are ultimately worth it for most people, depending on your retirement goals.
Since 401(k) contributions are pre-tax, the more money you put into your 401(k), the more you can reduce your taxable income. By increasing your contributions by just 1%, you can reduce your overall taxable income, all while building your retirement savings even more.
Should I stop contributing so much to my 401k? ›
When Not to Max Out a 401(k) Maxing out your 401(k) contributions might not make financial sense if you don't earn a high salary. For example, if you make $50,000 per year, contributing over 40% of your pay to retirement savings could leave you cash-strapped to pay current bills and expenses.
How do I avoid 20% tax on my 401k withdrawal? ›
Can you avoid taxes on 401(k) withdrawals?
- Contribute to a Roth 401(k). If your employer offers a Roth 401(k) option, you can contribute after-tax money to it. ...
- Convert to a Roth IRA. ...
- Delay withdrawals. ...
- Use tax credits and deductions. ...
- Manage withdrawals strategically.
A recession is one of the best times to contribute to your 401(k). Buying investments while the market is down is like shopping on sale.
How do I protect my 401k from a market crash? ›
Rebalance your portfolio
Along with setting long-term financial plans and helping ensure that your 401(k) is diversified, strategically rebalancing could help reduce your risk to market volatility.
Should I put more in my 401k? ›
In fact, most financial experts will suggest investing 15% of your income annually in a retirement account (including any employer contribution). With 401(k)s, or employer-sponsored retirement plans, you may find that your company offers a match if you contribute a certain amount.
Is maxing out a 401k a good idea? ›
If the fees in your employer-sponsored plan aren't high and you're offered a variety of investment options, it may be worthwhile to max out your contribution. If the fees are high, you could consider directing money toward a traditional or Roth IRA first.
Should I make catch-up contributions to my 401k? ›
Catch-up contributions are crucial if you are just starting to prepare for retirement in your fifties or if you need to rebuild your retirement savings for any reason. Contributions all year long. You can begin your catch-up contributions in the calendar year you turn 50 – you do not have to wait until your birthday.
Is it worth putting money in 401k right now? ›
Don't reduce your 401(k) contributions, or the allocation of new savings to stocks, just because the stock market is struggling at the moment. In fact, a bear market is often the right time to increase the percentage of income you contribute to your 401(k) if you can afford to do so.
What is the average 401k balance at age 65? ›
Average and median 401(k) balances by age
| Age range | Average balance | Median balance |
|---|
| 35-44 | $91,281 | $35,537 |
| 45-54 | $168,646 | $60,763 |
| 55-64 | $244,750 | $87,571 |
| 65+ | $272,588 | $88,488 |
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