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How Much Should You Contribute to Your 401(k)? (10 Pro Tips)

September 10, 2019

Saving for retirement can be a daunting task, but your 50-year-old self will be thankful you decided to do it earlier in your career.

The most common method of saving for retirement is through an employer-sponsored 401(k) plan. As a matter of fact, more than 55 million U.S. workers participate in one of these plans today.

While the amount of 401(k) participants increases, there is still general confusion of how much money people should be contributing to their plans from each paycheck.

To clear up some of the confusion, we asked 10 experts for their opinions on how much the everyday 401(k) participant should be contributing.

  1. Contribute as much as you can
  2. Contribute the maximum amount your employer matches
  3. Contribute more when you're young
  4. Millennials are contributing less than recommended
  5. It depends on your effective tax rate
  6. Diversify plans if possible
  7. Do not dip into your funds early
  8. Be sure to layout a retirement budget
  9. Think of medical needs later in life
  10. Talk to an advisor if you're unsure

10 tips for contributing to your 401(k)

In our beginner’s guide to 401(k) plans, we mentioned the 2019 contribution average hovered around 3 percent. But is this enough money to set yourself up nicely for retirement? Let’s hear what our 10 experts have to say.

1. Contribute as much as you can

Todd Kunsman, Founder of Invested Wallet

“The answer to how much someone contributes is always, as much as you can or max it out! But knowing everyone's income level and finances are different, I think the best answer should be to start with enough to get the company match. Some companies may offer a 100 percent match of the first 6 percent contributed or 100 percent of the first 3 percent contributed, for example. Whatever that number is, make sure that is what you contribute or you risk leaving money on the table!

I personally did not understand this early in my career and was not getting the full match. I wanted more money in my pocket instead of towards my 401(k), but in doing so, I left thousands of dollars behind.”

2. Contribute the maximum amount your employer matches

Robert Johnson, Ph.d., CFA, CAIA, and Professor of Finance at Creighton University

“Perhaps the worst financial mistake anyone can make is turning down free money. If one doesn’t contribute enough in a 401(k) plan that has a company match to earn that match, one is basically turning down free money. Contributing the max to your 401(k) also reduces your tax bill. Investors should do whatever it takes to participate in your company’s 401(k) plan to the level to get your full employer match.

Company matching requirements vary considerably by company. For instance, some firms will match contributions dollar for dollar up to a certain maximum. On the other hand, some plans require the employee to invest a certain minimum percentage of salary before the firm will contribute any employer match.”

Get 10+ personal finance resources, FREE.    Get my resources...3. Contribute more when you’re young

Kyle Kroeger, Founder of Financial Wolves

“I've been contributing the max amount to 401(k) since my second year out of college. I think anyone should strive for contributing the max contribution limit as soon as possible out of college, even if it requires you to find a job on the side. Why? Because as a young professional your income is only expected to rise. If you can price in the max contribution into your budgeting right from the start, your income will rise too.

A lot of people will increase their contributions when they get a raise. That just means that your take-home pay will stay the same. That makes it much harder psychologically to continue to increase your contributions. Most people don't even end up doing it. Bite the bullet early and max out from the get-go!”

4. Millennials are contributing less than recommended

Xavier Epps, Founder & CEO of XNE Financial Advising

“Ideally, if you have a 401(k), you should contribute 15-20 percent of your gross income into it. However, Millennials are contributing about 7.3 percent of their paychecks to retirement savings plans, according to Fidelity. Millennials are either a couple of years into their careers or still at their beginning stages. They face student debt, credit card, and low wages from either being underpaid or working part-time to pick up skills to use later in an established career.

millennials contribute 7.3 percent to their 401ksThere is no concrete number to how much one should contribute to his/her 401(k) in early career days, but one should look into their lifestyle and spending habits. Budgeting is key to savings. Budget for essentials such as rent, utilities, loan/credit payments, groceries, transportation, and anything else that you need. Include in your essentials contributions to your 401(k), and appropriately allocate a percentage of your income to your savings.”

5. It depends on your effective tax rate

Garrett Konrad, Partner at IFC Financial Advisors

“My biggest piece of advice regarding contributing to your 401(k) is to contribute up to the max amount. You can't beat the return on a 50-100 percent match and there's no reason to leave free money on the table. Contribute anything you can up to that maximum your company will match.

Once you hit the max (or your company doesn't offer a match), evaluate what your effective tax rate is. If you are paying 20 percent or less effective tax, save in a Roth 401(k) if available or a Roth IRA and pay the tax now instead of kicking the tax liability can down the road.”

6. Diversify plans if possible

Matthew Yu, Loan Originator for Socotra Capital

“Some employers have small matches, but some match dollar for dollar on your first 3-5 percent. That’s 100 percent ROI at the end of each year for your 3-5 percent contribution!

For those with less generous employee matches and limited investment funds, you should carefully gauge your company’s 401(k) plan to see if you could get better returns investing in a Self-Directed IRA. The amount you put into the 401(k) is just as important as the type of investment that your 401(k) is invested in.

For best diversification, I would recommend those new to the workforce to split up their retirement savings into their 401(k) and Roth IRAs. Set aside an investment budget that stings, but isn’t too painful. Your 401(k) will be automatically withdrawn every month. Money that doesn’t hit your pocket is much easier to invest than the money that comes out of it. Investing early pays dividends.”

7. Do not dip into your funds early

Peter Ferriello, CFP, Senior Wealth Advisor, and VP at Mollot & Hardy, Inc. Wealth Advisors

“At a minimum, people should contribute an amount equal to their employer match. Many workers miss out on free money that their employer is willing to contribute to their account. This is a critical mistake that has a lasting impact on one’s future. In order to calculate how much you should actually contribute beyond the match, it's recommended you sit with a financial planning professional, preferably a CFP(r), who can help you calculate the amount that is necessary, but also realistic.

It's also important to stress that taking loans and withdrawals from one's 401k can have detrimental consequences on the future value of the account.”

8. Be sure to layout a retirement budget

Deacon Hayes, Owner & Founder of WellKeptWallet

“Everyone's life and circumstances are unique. Therefore, what works for one person is not going to be a magic formula that works for all. That being said, it's always better to save more than you need rather than less.

Start by determining the age you would like to retire. Then, create a post-retirement budget to help you determine how much money you will need to save up ahead of time. Don't forget to include vehicles, insurance, taxes, and other expenses that are not always monthly.

You can use a 401(k) calculator to assist you in determining how much money you should be investing at any age. However, here is a general guideline (you may have to adjust these figures to suit your lifestyle and needs):”

  • At age 30 – a minimum of one year's salary
  • At age 35 – at least two years salary
  • At age 40 – three years salary or more
  • At age 45 – four years salary at minimum
  • At age 50 – at least five years salary
  • At age 55 – six years salary if not more
  • At age 60 – seven times your annual salary
  • At age 65 – at least eight times your yearly salary

9. Think of medical needs later in life

Annette Hammortree, CLTC, RICP, and Owner of Hammortree Financial Services

“When taking a look at your employer’s retirement plan, I suggest that you start by contributing 15 percent of your income. The 401(k) specifically should be for at least the full matching contributions offered by your employer. The next step depends on your goals and objectives.

​Once you have committed to matching the 401(k) contribution, the next step would be to utilize a Health Savings Account, since you can tap into this for medical needs during retirement, as well as starting a Roth IRA. The Roth is important since it provides another “bucket” to generate income during retirement. The power is in the rate of savings not the rate of return.

I also recommend taking a bucketing approach for different savings objectives, short (1-3 years), intermediate (3-15 years), long term (15-25 years) and retirement.”

10. Talk to an advisor if you’re unsure

Mr. SR, Founder of Semi-Retire Plan

“Consider what your goals for your future are. I encourage readers to plan the retirement of their dreams, decide how much money the will need to fund that dream, then calculate a savings rate to achieve that portfolio value.

But, depending on your income level now versus what you expect your income to be in retirement, you may want to consider a Roth option like a Roth IRA or a Roth 401(k). I recommend speaking with a financial advisor for personalized advice. Many companies actually offer free periodic financial advising from their 401(k) provider, so that could be a good option to start with.”

3 quick takeaways

So, what are a few common themes we can extract from our 10 experts?

  • First and foremost, establish a budget that takes into account your short and long-term financial commitments. If budgeting isn’t your strongest trait, check out our guide to making a budget for smarter spending.
  • Next, consider contributing as much as you feasibly can, especially if you’re early on in your career. You’ll have a general dollar amount of how much you can contribute to your plan after you establish a budget.
  • Finally, take into account employer matching if the company you work for provides it. As mentioned numerous times throughout the article, employer matching is essentially free money you can take advantage of.

Planning for retirement can be stressful, but you don’t have to go at it alone. If you still have questions, consider talking with a financial consulting provider to help clarify your approach to retirement.

Find the highest-rated Financial Consulting providers ...

How Much Should You Contribute to Your 401(k)? (10 Pro Tips) The average 401(k) contribution today is around 3%, but will that be enough for retirement? We asked 10 experts to answer how much one should contribute to their 401(k).
Devin Pickell Devin is a former senior content specialist at G2. Prior to G2, he helped scale early-stage startups out of Chicago's booming tech scene. Outside of work, he enjoys watching his beloved Cubs, playing baseball, and gaming. (he/him/his)

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