How Much Should I Put into my 401(k)?
November is the time of year when employees with company benefit plans get to review their options and enroll, or make changes, to their benefits. One question I hear every year is, “How much should I put into my 401(k)?” A good answer to that question is, “as much as you can.” But how do you figure that out?
For 2009, the maximum amount that you can put into your 401(k) is $16,500, unless you’re 50 years old or over, then you can put $22,000 per year in. If you can afford to put the maximum into your retirement plan, I recommend you do so. I have never yet heard anyone complain of having too much money for their retirement.
But what if you can’t afford to put $16,500 into your retirement? What if that’s all you make? How do you determine how much to save? As much as I always want to encourage people to put money into a retirement plan, if your financial situation is tight, and you might be forced to take the money out within the same year, don’t even put it in. The very first thing you want to do is have a little cushion in a savings account. If the car breaks down, or the roof needs a repair, you’ve got a little back up.
Let’s say your annual income is $30,000 a year and you have no savings whatsoever. Make a goal of saving 10% of your income. That’s 10% of $30,000, not 10% of your take home pay. To do that, you’d need to save $60 per week to save $3,000. (I gave you two weeks of vacation there.) If you can’t live with that, adjust down a little until you find an amount that you can save regularly without hurting yourself.
Once you’ve got a little savings cushion, it’s time to start the retirement savings. I always recommend that if your employer has a matching program, put in as much money as your employer will match. For example: let’s say your income is still $30,000 and your employer has a program where he’ll match what you put into your 401(k) up to 5% of your income. If you put in $1,500, he’ll match it with $1,500. That’s a 100% return on your investment. If you put in $3,000, he’ll still only match with the $1,500. If you can afford to save extra, that’s great, but the priority is the match.
Another consideration when deciding upon retirement contributions is reducing your income. Suppose you’ll have a graduating senior in 2011. 401(k) contributions would lower the income reported on your 2010 tax return, which could impact your scholarship potential. If you already have a child in college, education credits start phasing out at $50,000 ($100,000 if married filing jointly). If you’re near a trip point for a tax credit or deduction, it might make sense to increase your withholdings to get the credit. Check with your tax professional to see what works best for you.
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