How Much Money Should You Invest in 401 (k)

When we talk about personal finance, numerical guidelines traditionally tend to shape our monetary habits.

We often hear about having three to six months of living expenses in an emergency fund or abiding by the 50/30/20 budget rule (spending 50% of our home cleaning on needs, 30% on needs and 20% in debt repayment and savings).

The amount of money you save for retirement is no different. In fact, most financial experts will suggest investing 15% of your income annually in a retirement account (including any business contributions).

With 401 (k) s, or employer-sponsored retirement plans, your business may offer a match if you contribute a certain amount. For example, if your business earns up to 6% of your salary and you contribute 6%, you will double what you can leave.

While the more you can contribute, the better, Shannon Lynch, CFP of Personal Capital, says it’s generally a good rule of thumb to contribute, at the very least, to get the maximum level of employers if you have any. A business match involves extra money from your employer that goes to your 401 (k), so you want to do your best to take advantage of it. Otherwise, it’s “free” money you leave on the table.

If you are not yet in a position to contribute enough to meet your employer’s coincidence, and therefore not enough to achieve the desired 15% savings, seek to increase your retirement contributions by between 1% and 2% each year. If you choose to do this, some companies will automatically increase your contribution percentage annually, so it’s worth making sure you’re enrolled in what’s called an automatic climbing feature.

Ivory Johnson, CFP and founder of Delancey Wealth Management, recommends increasing your contribution rate as you earn pay raises until you exceed the cap. There is a limit to how much you can contribute annually to your 401 (k). In 2021, the standard annual contribution limit is $ 19,500 for 401 (k) plans. And those over 50 can use recovery contributions to add an additional $ 6,500 to their 401 (k) account. Employers ’contributions do not take these specific limits into account.

Lynch reminds retirement savers that they are strategic with the magic number they would like to contribute to their 401 (k), however, before attempting to automatically overcome it.

“Situations may arise where you may need to prioritize cash savings in the emergency fund or save for a different reason, such as an upfront payment for property or a vehicle,” he adds. “$ 19,500 is not a small piece of change.”

Please note that even if you do not pay income tax on the money you reserve in a 401 (k), you will have to pay taxes later when you finally withdraw the funds during your non-working years.

Don’t worry if your employer doesn’t offer a 401 (k); there are still ways to save for retirement on your own.

Many large banks and brokers offer individual retirement accounts, or IRAs, that allow you to place your retirement money on a number of investments, such as individual stocks, bonds, index funds, mutual funds, and CD. As with a 401 (k), you can set up automatic contributions to your IRA from a checking or savings account.

When looking for an IRA, choose an account that has no minimum deposits, offers no-commission transactions, and offers several investment options. Given these factors, Select downgraded our favorites for each type of retirement savings. (See our methodology for more information on how we choose the best traditional IRAs.)

In 2021, the standard annual contribution limit is $ 6,000 for IRAs. Those over the age of 50 can use recovery contributions to add an additional $ 1,000 to their IRA. Similar to a 401 (k), a traditional IRA can reduce your taxable income, which means you owe a little less to the government each year you contribute.

If you are a younger investor or plan to earn more income and a higher tax rate when you retire, consider a Roth IRA than a traditional IRA. With Roth IRAs, you pay taxes in advance by contributing dollars after taxes, and later on when you retire, withdrawals are tax-free (as long as your account is open for at least five years).

To determine which retirement accounts (IRAs) are best for investors, Select has analyzed and compared the traditional IRAs offered by domestic banks, investment firms, online brokers, and theft advisors. We lowered our rating to include only those that offer stock-free trading and no-commission ETFs, as well as a wide variety of investment options so you can maximize your retirement savings.

We also compared each IRA with the following functions:

• $ 0 minimum deposit: All IRAs in our classification do not have minimum deposit requirements.
• Low rates: We considered the commissions of each IRA, the negotiation commissions, and the transaction commissions.
• Bonus offered: Some IRAs offer promotions for new account users.
• Variety of investment options: The more diversified your portfolio, the better. We have made sure that our best options offer investments in stocks, bonds, mutual funds, CDs and ETFs. Most also offer options trading.
• An educational resource center: We opted for the IRA with an online resource center or counseling center to help you find out about retirement and investment accounts.
• Ease of use: Whether you’re accessing your IRA from your laptop at home or from your smartphone while you’re at it, it’s important to have an easy user experience. We observed when the investment platform stood out in usability.
• Customer service: All IRAs on our list offer customer service available by phone, email, or secure online messaging.

After reviewing the above features, we sorted out our recommendations for which type of investor is best suited, from novice and practical investors to more experienced and practical investors.

Your earnings on an IRA depend on the associated fees, contributions you make to your account, and market fluctuations.