Retirement is a subject a lot of us don’t like to think about. Younger Americans believe that because of their age they don’t have to start thinking about retirement until decades later. It’s far off into “the future.” The truth is though, most of us will decide to stop working one day. Thanks to advances in medicine, our life expectancy is increasing and more people are living into their 80s and 90s. Thus, it’s safe to say that the retirement stage of our lives could last 20 to 30 years or more.
So how much should you put away for retirement? According to U.S. News, there are several factors in deciding how much to contribute to a 401(k):
- Maximum allowable amount
- Matching level
- Default rate
- Saver’s credit limit
- A personal calculation
- Professional recommendations
- Do what you can
Maxing out a 401(k) (investing $17,000 in 2012) may not be possible for everyone. If you’re in this group, they have a good recommendation:
If you can’t max out your 401(k), try to contribute enough to get the maximum possible 401(k) match. The most common 401(k) match formula is 50 cents for each dollar contributed up to 6 percent of pay. Under this match formula, an employee earning $50,000 who saves $3,000 in the 401(k) plan will get another $1,500 from his or her employer as a matching contribution.
If you’re not getting the match, you’re leaving $1,500 on the table!
Enrollment in 401(k) plans varies by employer. When you start a new job, your employer may automatically enroll you in their 401(k) plan. Pay attention to what your contribution percent is and whether it increases over time. On the other hand, you may have to choose to opt-in to the plan. In this case, you can choose what percent of your income to set aside. If your financial situation changes, you should be able to change your contribution percentage each quarter.
When you file your taxes, you may be eligible for the savers tax credit based on your income. Along with the company match, this provides another incentive to save for retirement.
It’s always a good idea to come up with your own estimate for how much money you’ll need during retirement. A good rule of thumb is that you’ll need at least 80 percent of your current income to live comfortably in retirement. This estimate will change over the course of your working life assuming your income increases.
If the thought of coming up with an estimate overwhelms you, enlist a fee-only financial planner to help. Either way, the article makes a good recommendation:
On average, 401(k) plan sponsors say employees should be saving 12 percent of their pay including employer contributions over their entire working career in order to provide adequate income during retirement.
I think 12 percent is a good number, but over time this should increase to 15 and even 20 percent of your income. Besides, investing in a 401(k) is a good way to reduce your current tax burden. 🙂