For some workers, 401(k) plans are among the premier employment benefits, but landing a job with this retirement perk is only part of the battle.
Obviously, everyone’s circumstances are different so there’s not a lot of uniformity when it comes to exactly how a much a worker should contribute to a 401(k) plan. An employee paying student loans or carrying significant credit card debt typically needs to service those obligations as soon as possible, and may not be able to take full advantage of a 401(k).
However, one of the rules of thumb with 401(k) plans is that staffers that can “take it to the max” should in fact do that.
“While the more you can contribute the better, Shannon Lynch, a CFP at Personal Capital, says that it’s generally a good rule of thumb to contribute at least enough to get your full employer match if you have one. A company match is additional money from your employer that’s put into your 401(k), so you want to do everything you can to take advantage of that. Otherwise, that’s ‘free’ money you’re leaving on the table,” reports Elizabeth Gravier for CNBC.
Workers can consider creating a strategy by which they make it a point to boost contribution percentages every year and perhaps contribute more when they earn raises. Over time, that plan can pay off.
“If you aren’t yet in a position to contribute enough to meet your employer’s match, and thus not enough to reach the desired 15% savings rate, aim to boost your retirement contributions by 1% to 2% each year. If you opt in to do so, some companies will automatically raise your contribution rate annually, so it’s worth making sure you are signed up for what is called an ‘auto-escalation’ feature,” according to CNBC.
Workers whose employers don’t offer 401(k) plans can consider individual retirement accounts (IRAs). For 2021, the IRA contribution limit is $6,000, or $7,000 for workers 50 years old and older.
For more on income strategies, visit our Retirement Income Channel.