401K Contribution
February 22, 2012 8:51 AM Subscribe
What percentage should I contribute to my 401K?
So I know the answer is, "as much as you can afford," but just wondering what the average percentage is people contribute to their 401K plan? My company matches up to 6% with an optional 1% automatic increase each year.
Thanks!
So I know the answer is, "as much as you can afford," but just wondering what the average percentage is people contribute to their 401K plan? My company matches up to 6% with an optional 1% automatic increase each year.
Thanks!
Best answer: Yup, definitely what the company will match. I believe the "average" is 3% to 7%.
posted by Melismata at 8:56 AM on February 22, 2012 [3 favorites]
posted by Melismata at 8:56 AM on February 22, 2012 [3 favorites]
Yeah, the absolute minimum you should contribute is the amount that your employer will match. Anything less is giving up free money.
posted by Grither at 8:56 AM on February 22, 2012 [4 favorites]
posted by Grither at 8:56 AM on February 22, 2012 [4 favorites]
"As much as the company matches" is a popular answer, as is a total of 10% of your gross pay (including company contributions). I've also heard "half the age you started contributing, as a percentage of your current gross pay".
Or you could go here and run the calculations on how much you actually need to contribute in order to have the retirement that you personally would like to have.
posted by emilyw at 8:56 AM on February 22, 2012 [2 favorites]
Or you could go here and run the calculations on how much you actually need to contribute in order to have the retirement that you personally would like to have.
posted by emilyw at 8:56 AM on February 22, 2012 [2 favorites]
Here's the standard personal finance wisdom, as I understand it. If you have significant debt at high interest rates (e.g., anything other than a home mortgage or student loans), pay that off first, because the interest rates on credit card debt, car loans, etc. will outweigh any benefit you get from saving your money. Then, contribute as much as you have to in order to get the maximum possible match. A company match is free money, so you'd be silly to leave any of it on the table. Above that, if you still have money left, fund a Roth IRA. You'll pay taxes out of pocket now, but be able to withdraw from the account tax-free in retirement, which is a huge benefit if you're in a lower tax bracket now than you will be then (or if you believe, as many people do, that the government will have to raise overall taxes over the next few decades to keep government programs afloat). If you still have money left after that, put more into either your 401(k) or into an independent retirement account (depending on whether your 401(k) offers good investment options) until you are saving 15% of your gross income towards your retirement. Depending on your other goals (e.g., saving for other things), you may want to save more, but 15% should be your target minimum.
I have no idea what the average contribution is, but you don't want to be average. Average means you'll be poor and struggling when you retire, and you don't want that. You want to be secure, maybe even wealthy. And that means saving at least 15% of all the money you make throughout your career.
posted by decathecting at 8:57 AM on February 22, 2012 [4 favorites]
I have no idea what the average contribution is, but you don't want to be average. Average means you'll be poor and struggling when you retire, and you don't want that. You want to be secure, maybe even wealthy. And that means saving at least 15% of all the money you make throughout your career.
posted by decathecting at 8:57 AM on February 22, 2012 [4 favorites]
It depends on what your goals are -- will you be going back to school? Are you close to retirement? Do you have outstanding loans to pay off? etc.
I asked a related question about 401(k) saving while also planning for graduate school, and what I decided to do was to match up to my maximum company contribution, so I put in 6% to get the max in 3% of free money. (And then I sock away money for grad school expenses.)
I concur with all to match out the company matching. Do pay attention to your company's vesting policy -- if you leave many companies before a certain date (mine is three years) you will lose your free money. This is not to say that you shouldn't contribute up to your company matching -- it's just something to be aware of.
posted by andrewesque at 8:59 AM on February 22, 2012
I asked a related question about 401(k) saving while also planning for graduate school, and what I decided to do was to match up to my maximum company contribution, so I put in 6% to get the max in 3% of free money. (And then I sock away money for grad school expenses.)
I concur with all to match out the company matching. Do pay attention to your company's vesting policy -- if you leave many companies before a certain date (mine is three years) you will lose your free money. This is not to say that you shouldn't contribute up to your company matching -- it's just something to be aware of.
posted by andrewesque at 8:59 AM on February 22, 2012
I contribute 18%. I'm an anomoly though- my reasoning several years ago was that figure I dump in as much as I can at the start of my career and then if I end up being a ski bum/take time off to have kids/life explodes, at least I've got something already started.
I actually started with 25% of my paycheck, since going from broke college student- to woo money! the amount taken out wasn't really enough to change my life style even with some definite material upgrades (wooo appetizers and fancy drinks at dinner!). Life has happened though, and it doesn't make sense for me to dump that much in to my 401k any more. (I'd rather have money accessible in short term savings for life emergencies)
Most of my colleagues and friends in their early 20's range from 2-8%, basically only as much as the company matches.
posted by larthegreat at 8:59 AM on February 22, 2012
I actually started with 25% of my paycheck, since going from broke college student- to woo money! the amount taken out wasn't really enough to change my life style even with some definite material upgrades (wooo appetizers and fancy drinks at dinner!). Life has happened though, and it doesn't make sense for me to dump that much in to my 401k any more. (I'd rather have money accessible in short term savings for life emergencies)
Most of my colleagues and friends in their early 20's range from 2-8%, basically only as much as the company matches.
posted by larthegreat at 8:59 AM on February 22, 2012
Proceed in this order: (1) contribute to 401(k) up to your employer match; (2) contribute to Roth IRA; (3) pay off high-interest debt; (4) build emergency savings; (5) contribute more to the 401(k). The order of items 2 through 4 are fungible based on your age, needs, life situation, etc. You seem to have a fantastic employer match program so take advantage of that to the fullest.
Above and beyond the employer match, a Roth IRA generally works out better than 401(k) contributions. Your Roth contribution is post-tax and your withdrawals after retirement age are tax free, meaning you don't pay taxes on your investment gains. Your 401(k) contribution is pretax but you get taxed on the withdrawals, which includes your investment gain.
That said, the $5000 annual limit on the Roth is woefully insufficient by itself to lead to a comfortable retirement. You are also making an assumption that the marginal tax rate on your annual retirement income will stay the same or go up. If you expect tax rates to go down or you're in a high marginal bracket now, maybe the 401k makes more sense. Fuzzy math as the saying goes. But I think I made a giant stupid by not opening a Roth account until last year.
posted by Saucy Intruder at 10:06 AM on February 22, 2012
Above and beyond the employer match, a Roth IRA generally works out better than 401(k) contributions. Your Roth contribution is post-tax and your withdrawals after retirement age are tax free, meaning you don't pay taxes on your investment gains. Your 401(k) contribution is pretax but you get taxed on the withdrawals, which includes your investment gain.
That said, the $5000 annual limit on the Roth is woefully insufficient by itself to lead to a comfortable retirement. You are also making an assumption that the marginal tax rate on your annual retirement income will stay the same or go up. If you expect tax rates to go down or you're in a high marginal bracket now, maybe the 401k makes more sense. Fuzzy math as the saying goes. But I think I made a giant stupid by not opening a Roth account until last year.
posted by Saucy Intruder at 10:06 AM on February 22, 2012
On preview, I'm basically saying the same thing as Saucy Intruder.
Yeah, there's no one answer to this question. If you have money to set aside, then the main options for most people are 401K, a Roth IRA, and a traditional IRA.
Roth IRA: you pay taxes now, but the growth is tax-free. Only an option if you make less than $105K as an individual (partial funding in the range $105K-$120K, different rules for filing jointly)
Traditional IRA and 401K: you pay taxes later, at the (presumably) lower rate you're taxed at in retirement.
For most people, the order should go like this: 1. 401K to get the employer match, because free money; 2. $5K ($6K if you're over 50) to Roth IRA; 3. More 401K, up to the limit; 4. Some kind of brokerage account.
If you don't know of something specific to your situation that perturbs that order (e.g., I like SRI, so I do that instead of more 401K), just do that.
posted by gurple at 10:10 AM on February 22, 2012 [1 favorite]
Yeah, there's no one answer to this question. If you have money to set aside, then the main options for most people are 401K, a Roth IRA, and a traditional IRA.
Roth IRA: you pay taxes now, but the growth is tax-free. Only an option if you make less than $105K as an individual (partial funding in the range $105K-$120K, different rules for filing jointly)
Traditional IRA and 401K: you pay taxes later, at the (presumably) lower rate you're taxed at in retirement.
For most people, the order should go like this: 1. 401K to get the employer match, because free money; 2. $5K ($6K if you're over 50) to Roth IRA; 3. More 401K, up to the limit; 4. Some kind of brokerage account.
If you don't know of something specific to your situation that perturbs that order (e.g., I like SRI, so I do that instead of more 401K), just do that.
posted by gurple at 10:10 AM on February 22, 2012 [1 favorite]
A couple more details on the good advice above: It's not mentioned here, but some companies offer a Roth option in their 401k program. This can be an option even if you reach IRS limits on contributions to a Roth IRA.
Also, in the long term as your salary increases, any high interest debt is paid off and your options decrease due to IRS limits - you will eventually want to contribute the IRS pre-tax maximum to your 401k and then consider other outside options. (Note given your salary and the max % allowed by your plan, the maximum yearly contribution your plan allows might be higher than the IRS pre-tax maximum, in this case think carefully about where the "after-tax" contributions are best invested: in the 401k or an outside account)
posted by NoDef at 11:27 AM on February 22, 2012 [1 favorite]
Also, in the long term as your salary increases, any high interest debt is paid off and your options decrease due to IRS limits - you will eventually want to contribute the IRS pre-tax maximum to your 401k and then consider other outside options. (Note given your salary and the max % allowed by your plan, the maximum yearly contribution your plan allows might be higher than the IRS pre-tax maximum, in this case think carefully about where the "after-tax" contributions are best invested: in the 401k or an outside account)
posted by NoDef at 11:27 AM on February 22, 2012 [1 favorite]
I max it out. Less than the employer match is throwing money away. Frankly, unless you've already got tons of money in there, the closest you can afford to the IRS max is probably the best answer. The younger you are, the more important it is to pay in (a nice catch-22).
(However, my 401k offers easy loans and emergency withdrawals, so it's easier to feel that the money isn't gone -- this definitely helps me justify maxing it out.)
posted by zvs at 4:19 PM on February 22, 2012
(However, my 401k offers easy loans and emergency withdrawals, so it's easier to feel that the money isn't gone -- this definitely helps me justify maxing it out.)
posted by zvs at 4:19 PM on February 22, 2012
Zero - I assume that the funds will be lost / stolen / nationalized / shrunk by inflation before I get to take them out in 17 more years. Bernake has already stated he will target 2% inflation (which most commentators seem to mean he's actually shooting for 4%) This (4% inflation) will eat 1/2 of any investment in the 17 years before I can start withdrawing from my 401k.
Having liquid cash is good for the short term, with a set of long term investments that you have no counterparty risk to is also good.
The best investment is intangible, very strong friendships with stable adults who have a clue and can use your help get though the chaos that life brings, and return the favor.
posted by MikeWarot at 7:21 PM on February 22, 2012
Having liquid cash is good for the short term, with a set of long term investments that you have no counterparty risk to is also good.
The best investment is intangible, very strong friendships with stable adults who have a clue and can use your help get though the chaos that life brings, and return the favor.
posted by MikeWarot at 7:21 PM on February 22, 2012
In a perfect world, I'd say find out the maximum you are legally able to contribute, divide it by the number of pay periods per year and there's your per-pay-period contribution. To find the percentage, divide the contribution by your gross paycheck for pre-tax contributions.
posted by bendy at 8:49 PM on February 22, 2012
posted by bendy at 8:49 PM on February 22, 2012
In response to MikeWarot's concerns about inflation: To the extent that you are investing in assets like broad market indexes and company stocks, inflation should not actually hurt your returns (since your investment is backed by the tangible assets that the companies own). Inflation does/will hurt you to the extent that you hold large amount of money in cash or cash like assets.
Whether there is a significant risk of the money getting stolen/lost/nationalized, I don't have as clear cut of an economic argument against, but I am betting against that possibility.
It is worth noting that Roth IRAs end up being dramatically worse than non-roth investments (i.e. pre tax) if the government were to raise taxes via a value added tax, instead of raising marginal income tax rates.
posted by vegetableagony at 7:47 AM on March 3, 2012
Whether there is a significant risk of the money getting stolen/lost/nationalized, I don't have as clear cut of an economic argument against, but I am betting against that possibility.
It is worth noting that Roth IRAs end up being dramatically worse than non-roth investments (i.e. pre tax) if the government were to raise taxes via a value added tax, instead of raising marginal income tax rates.
posted by vegetableagony at 7:47 AM on March 3, 2012
This thread is closed to new comments.
posted by restless_nomad at 8:52 AM on February 22, 2012 [3 favorites]