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.
The rule of thumb for retirement savings is 10% of gross
salary for a start.
If your company offers a matching contribution, make sure
you get it all.
If you’re aged 50 or over, you’re allowed to make a catch-up
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 the tax year 2021, and $20,500 for 2022.
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 2021 and 2022.
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
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
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 2021-2022 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 $6,000.
“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 amount your employer matches does not count toward
your annual maximum contribution.
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
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 2021 and 2022 is $6,000, with a $1,000 catch-up contribution for those
age 50 or older).
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,
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