How Much Do You Contribute to Your 401(k)?

How Much Do You Contribute to Your 401(k)?

Kyle Swaim
TB Group LLC

 

Do you have a defined contribution retirement plan?  Nearly 60% of workers over the age of 56 do, according to a 2022 government report. In this post, I am going to discuss retirement plans. If you don’t want to read any further, just understand one thing. If you have the opportunity to participate in a defined contribution plan, and you don’t do it, you are leaving money on the table. My title for this post asks “How much do you contribute to your 401(k)?” The only sensible answer is “As much as I possibly can.”

 

The Biggest Bargain in Your Household Budget

Every dollar you contribute to a defined contribution plan (up to the allowed maximum) reduces your tax bill. Not only that, but the money your contributions produce (through compound interest or other return on investment) is also protected from taxes until you retire. Furthermore, employer-sponsored plans usually feature “matching” contributions by the employer — free money, in other words.

 

Defined contribution plans include the 401(k), which is the most common type, the 403(b), the 503(b), and Thrift Savings. These are all plans in which employees can build tax-deferred savings in employer-sponsored accounts. There are also IRA and Keogh plans, which do the same thing but are administered by individuals on their own behalf. Finally, there is the Roth IRA, which allows you to invest after-tax money. There is no tax savings up front, but the money you invest can grow tax-free.

 

Start Early, Get Rich

Retirement plans are such a bargain that it’s surprising only 60% of older workers participate. And for younger age groups, participation is even lower. Those in the 40-55 group participate at the rate of 56.1%. For those who are 24-39, the rate is 49.5%. And for those 15-23, the rate is a mere 7.7%.

 

The truth is, the closer you get to retirement age, the more focused you get on retirement. That’s another way of saying that people are more likely to deal with near-term needs than they are to deal with those that seem more remote. It’s a perfectly human way of dealing with life’s phases, but it is wrong-headed. 

 

It’s wrong-headed because a dollar you put away when you are younger has more impact than one you put away when you’re older. From a purely financial standpoint, making a contribution to a retirement plan is one of the best things a younger worker can do. Let’s say you’re 25, and you decide to put $50 a month into the plan. Forty years later — at a rate of return of 10% — you have a nest egg of $265,555.53 — over a quarter million dollars, in other words.* On the other hand, if you start contributing the same amount, at the same rate of return, when you are 55, your nest egg is a small fraction of that quarter million: $9,562.45. If you want to try different amounts, durations, and rates of return, there’s a nice calculator here.

 

Contribute to Your 401(k)

They all operate in similar ways, but every retirement plan has its own rules and restrictions. My advice is to find out what sort of plan you’re eligible for and then figure out the largest contribution you can make that doesn’t compromise your standard of living. If you’re already participating in a retirement plan, good for you. Can you increase your contribution?

 

If you need help learning what plan you’re eligible for, or if you need advice on choosing how to invest your contribution, let TB Group be a resource for you. We are experts in helping you gain the maximum advantage from the alternatives available, and we are committed to helping you meet your retirement goals. Click here to set up your consultation.

 

*I chose a 10% rate of return because the S&P 500 has averaged 10.53% over the last 100 years.

 

Photo: “Notebook and Envelope with Money” by Towfiqu barbhuiya via Pexels.

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