How Much Should I Contribute to My 401(k)?

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.

If you have a 401(k) plan, you should contribute enough from each paycheck to take advantage of any match that your employer offers. Otherwise, you are losing out on part of your compensation and leaving free money on the table.

Past the employer match, though, how much you can contribute depends on a variety of factors, including your age, other retirement plans, income, lifestyle, and more. Learn what factors can affect your retirement saving so you can decide how much of a 401(k) contribution is right for you.

What Is a 401(k)?

A 401(k) is a defined-contribution retirement savings plan offered by many employers that comes with tax advantages. You pay into your 401(k) while you are working by adding a percentage of each paycheck into the account. That money is invested into the funds, usually mutual funds, that you choose when you set up your plan, where it grows until you reach retirement.

Many employers offer a matching contribution, called an employer match, up to a certain percentage of what you contribute to your 401(k). For example, if your employer offers a 5% match, then if you contribute 5% of each paycheck to your 401(k), your employer will match that 5% and contribute the same amount. If you contribute 3%, your employer will only contribute 3%. If you contribute 7%, your employer will still contribute 5%.

For a traditional 401(k), contributions are pre-tax. This means the money is taken our of your paycheck, and you don't pay taxes on it that year. You will pay taxes on the withdrawals that you make in retirement.

Another type of 401(k) is a Roth 401(k). Contributions to these accounts are after-tax, meaning you still pay taxes on them in the year you make your contribution. However, you don't pay taxes on withdrawals in retirement. Employers can still offer a match for a Roth 401(k).

There are income limits on who can participate in a Roth 401(k). Both types of 401(k) plans have contribution limits that are adjusted annually for inflation.

401(k) Contribution Limits

When starting to save for retirement through employer contribution plans, it's important to know the annual contribution limits set by the Internal Revenue Service (IRS). The elective deferral (contribution) limit for employees who participate in a 401(k) plan is $22,500 in 2023 ($20,500 in 2022).

If you are over age 50, you can also make additional catch-up contributions. In 2023, you can make an additional contribution of $7,500 ($6,500 in 2022) if you are age 50 or older.

These contribution limits also apply to other plans, such as 403(b) plans, most 457 plans, and the federal government's Thrift Savings Plan: $20,500 for the tax year 2022, and $22,500 for 2023, plus catch-up contributions for those who qualify.

401(k) Employer Match

How much to put in your 401(k) is going to depend on your individual retirement goals, existing resources, lifestyle, and family decisions. A common rule of thumb, though, 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 your salary or 50% of the first 6% of the employee contribution.

"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.

Another way to think of an employer match is that it is also compensation offered as a benefit of your job, the same as your health insurance or vacation days. If you don't take advantage of it, you are forgoing some of your compensation. 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.

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. For most people, though, it probably won't be.

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

How Much to Save in a 401(k) If You're Closer to Retirement

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 2023 limit on catch-up contributions is $7,500 for individuals who are age 50 or older on any day of that calendar year.

If you turn 50 on or before Dec. 31, 2022, for example, you can contribute an additional $7,500 above the $22,500 401(k) contribution limit for the year for a total of $30,000 including catch-ups.

"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 You Contribute, 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.

401(k)s vs. Bills vs. Emergency Fund

It can feel overwhelming to try to save for retirement, while also building an emergency fund, while also trying not to fall behind on your bills. Depending on your income and your cost of living, you may find yourself unable to save a full 10% in your 401(k).

To decide how much to allocate to bills, emergency savings, and your 401(k), start by calculating your mandatory expenses. These are things like your housing costs, utilities, childcare, and medications. Total up your mandatory monthly expenses (averaging variable costs such as groceries if you need to) and subtract that from your monthly income. Your 401(k) contributions and emergency savings will come out of the remaining discretionary funds.

Take a look at what's left. Even if you can't afford to contribute a full 10% of your paycheck to a 401(k), you should at least attempt to contribute enough to get any employer match. This will double the amount that is contributed to your 401(k) every month at no extra cost to you.

When it comes to emergency savings, just remember that something is better than nothing. Your eventual goal is to have enough saved to cover your mandatory expenses for several months. But you don't have to get there right away. If you save $50 a month, you will have $600 saved by the end of the year. If you save $100 a month, you will have $1200. Automate your emergency savings if you can so you aren't tempted to spend that money.

However, if you have high-interest debt, such as credit card debt, you may need to pay that off first, before you work on your emergency savings. Even if you put your emergency fund in a high-yield savings account, the interest you earn there will still not be higher than what you will be charged in interest on your debt. Focus on paying off your debt as quickly as possible, then return your focus to building up your emergency savings.

Once you've allocated your income to these different goals, then you can divide what is left from your income among other discretionary expenses. As your income grows or your debt is paid off, you can begin to put more money into both your 401(k) and your emergency savings.

401(k) Savings by Age

How much you can save in a 401(k) will depend on your income and life circumstances. It can be helpful, though, to have some benchmarks to aim for as you try to save effectively for retirement.

Investment firms such as Fidelity often recommend an every-ten-years model, where you aim to have a certain number of years of income saved every ten years. For example:

• Save your annual salary by age 30
• Save three times your annual salary by age 40
• Save six times your annual salary by age 50
• Save eight times your annual salary by age 60
• Save 10 times your annual salary by age 67

These numbers aren't exclusive to your 401(k); they count all your retirement savings, including other accounts such as a Roth IRA. However, these numbers also assume that you began investing early enough to really take advantage of compound interest and have other saving available in wealth-generating accounts such as stocks or mutual funds.

Your personal savings goals may also be different depending on when you plan to retire, if your work provides a pension, whether you have health problems, and what you would like your lifestyle to look like in retirement.

Because they do not take your individual needs and goals into account, these benchmarks can be helpful, but they should not be taken as a strict guide. Instead, talk to a financial planner to come up with a plan that is specific to your circumstances. Many banks and Employee Assistance Programs offer financial counseling services that you can take advantage of to plan your retirement savings.

IRAs and Roth IRAs

For those who want to go even further, there are several options for other retirement accounts. A popular choice is a traditional IRA or a Roth IRA.

An IRA (individual retirement account or individual retirement arrangement) is a retirement plan that anyone can set up and contribute to, unlike a 401(k) which is offered by an employer.

For a traditional IRA, you contribute pre-tax dollars, which means you are not taxed the year you earn that money. Instead, you are taxed when you make withdrawals in retirement. A Roth IRA is funded with after-tax dollars, so you pay taxes when you earn the money and not when you withdraw it. There are no distribution requirements for a Roth IRA, so your money can continue to grow tax-free for as long as you like.

The limit on IRA contributions for tax years 2023 is $6,500, with a $1,000 catch-up contribution for those age 50 or older. Roth IRAs also have income limits based on your tax status. Single filers cannot have a modified adjusted gross income of more than $153,000 in order to contribute to a Roth IRA, and the amount you can contribute begins to phase out if your income is $138,000 or higher. For a married couple filing jointly, the MAGI limit is $228,000 and contributions begin to phase out at $218,000.

The Bottom Line

"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, CA. 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, 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.