Trying to figure out how much you should be contributing to your 401k can almost seem like a full time job, in and of its own. The same system for planning retirement simply does not work for everyone. When you are trying to come up with an appropriate figure there are a few questions you need to ask.
You should question yourself on how much you should be saving and what types of accounts you want to be using. Here is a quick run down on how to go about figuring out the answers to these necessary questions.
How Much Should I Be Saving?
To be honest there are a number of calculators and tools that you can use online to figure out how much you should be saving. However, while these tools are meant to make the process simple, they do not take into account certain personal differences or variables. There are simply too many unforeseen factors in the future to base your retirement and savings plan on a generic calculator. The markets may not head in the direction that you expect, you could lose your job, or you may be unable to make certain savings payments for an extended period of time due to an emergency.
However, you can use these calculators to get a general idea and then tweak it based on what you are after and what you can afford. Once you have arrived at a target that seems reasonable the key is to adhere to it as much as possible. While your financial situation may change you can take heart in the fact that you are doing your best to secure a rewarding retirement.
Where Should I “Save” My Savings?
If you are planning ahead at all or are currently saving for retirement then you already know that your 401k is your best starting point. It is often the easiest, most convenient option, and often comes with some beneficial advantages when it comes to certain taxes. Often times your employer will match the contribution that you up until 6% of your salary.
Thus, it is very wise to contribute as much as possible with your 401k in order to get as much money from your company as possible. If you have calculated a low savings rate then this alone may be enough for a comfortable retirement, but for many that will not be the case.
If you need to save more, or feel that you can afford to save more in order to play it on the safe side, then you basically have two options to choose from. The first option is to continuously pump as much money into your 401k as possible. While individual plans may have lower ceilings to work with, the law generally allows you to contribute around $16,000 per year and up to $5,500 more if you are over the age of 50. While this may not be the savviest approach, it is a popular route to take because of its simplicity.
Your payment gets taken out of your salary automatically and you will often forget that you are actually saving that much money. There is far less risk of spending the money before you realize that it is supposed to go into your savings. If you still feel the need for more and have maxed out your contributions then you can look into savings options such as regular IRA’s or Roth IRA’s. Both of these tax advantaged options allow you to contribute as much as $5,000 as long as you are deemed eligible.
Your second option is to take the same sort of approach with your 401k but only contribute to the point where your employer will match. After you have reached that limit you can then pump as much as you can into a tax advantaged savings account rather than contributing more to your 401k. Overall the key here is to at least get some of your savings into an IRA account. The tax free withdrawals that are applicable for a Roth IRA can prove to be very beneficial later on and protect you against higher tax rates that may apply in the future.
To make things easy for you, if you are looking for alternatives for saving your money, are eligible for an IRA, and are disciplined when it comes to your retirement fund, then a Roth IRA is an excellent choice. However, if you do not qualify for such an account, or cannot trust yourself to remain diligent with the payments each month, then you may want to just max out your 401k. The simplicity involved is exactly what a lot of people are looking for when trying to plan out the perfect retirement.
No matter how you look at it, it is time to take retirement seriously. Take the time to make a plan and ensure you are saving enough. If you are not putting enough aside then it doesn’t matter which route you take, you will be left short come time to retire.