How Much Should I Contribute to My 401(k)?

Saving_for_Retirement_Contribution_401kFour years ago, I knew very little about saving for retirement.  But I didn’t need to know anything yet, since I had just graduated and I was more worried about getting a job than saving for retirement.  Once I landed that great-paying job though and got my first paycheck, I had to decide how much to contribute to my 401(k).

Saving and investing for retirement isn’t something they teach you about in school(they should though!).  So it’s up to you to independently do your own research and figure out what to do.  I am shocked and sometimes appalled at the lack of knowledge my co-workers have when it comes to investing.  I’m talking about the basics: the difference between a 401(k) and a Roth, the tax treatment of 401(k) contributions, etc.

It’s funny how conscientious people can be about their every day finances but so lackadaisical when it comes to retirement.  People are living longer than ever, things are getting more expensive and taxes are going up.  This all leads to a higher cost of living in the future and the more money we’ll need in retirement.  The current 401(k) system sucks and it doesn’t work for most people because it gives them the option to contribute.  Most people would rather see a larger paycheck today so they tend to contribute less.

I would much prefer a system like Australia’s, where employers are forced to contribute 9% to a Suncorp superannuation fund.  Unlike social security, the money is still yours though.  I prefer this ‘forced contribution’ since it’s kind of like an auto-deduction from your paycheck.  You’re essentially getting the same salary, but 9% of it is automatically siphoned off to your retirement account.  Most of us don’t live in Australia though, so we need to figure out how much to contribute ourselves.

The Bare Minimum

The minimum amount to contribute is usually pretty easy to determine: you’ll want to contribute at least up to your company match.  Pretty obvious right, why would you turn down free money?  I can’t think of one good reason not to contribute up to your company match.

For those who do contribute the minimum, great job but you should probably be contributing more.  Successful people don’t ever become so by doing the bare minimum.  Why would you go through your whole life over-achieving in school, in sports and busting your ass at your job but only contribute the minimum when it comes to retirement?  That baffles me.

So What’s the Right Number?

I’ve thought a lot about this question over the past few years and I’m still trying to find an eloquent way to answer it.  I think a lot of new grads tend to get too accustomed to living off their parents during college and once they’re on their own it’s natural to want that same lifestyle.  All students don’t follow this path. Many will take out loans for undergrad, find a job and work around the pursuit of a flexible setup such as night classes or pursuit of an online mba program.

Most people need to have their ‘investing epiphany’ before they realize the benefits of compounding interest.  Save a lot now so that you can have your money working for you for 40+ years and earning interest that whole time.  I was 22 when I had my ‘epiphany’ and since then, I’ve worked hard to make as much as I could so that I could save as much as I could.

I’m fortunate to have had my epiphany early on and that determination has allowed me to amass a 6 figure retirement portfolio by the tender age of 26.  Go type those numbers into a retirement calculator and maybe you’ll have your ‘investing epiphany’ too.  Too lazy?  Ok, you’d have about a million dollars in your retirement account(assuming a conservative 6% return over 40 years) when you retire at the age of 65.  That’s without ever contributing another dime for the next 40 years.  Reason enough for you to save?

Increase the Contributions

Even though I now max out my 401(k), Roth IRA and HSA it wasn’t always like that.  I started off slow with a 401(k) contribution up to the match but every year I would add 1% to my contribution.  A lot of employers actually have programs that you can sign up for that will automatically increase your 401(k) contribution each year.  Since there are new tax laws going into effect and older ones expiring every year, your paycheck from year to year will always differ, so you shouldn’t even notice a 1 or 2% change.

I’ve talked before about how contributions matter more than performance when you’re young.  And the best way to increase your contributions without affecting your take home pay is to use your raises and merit increases to offset your contribution increases.  I’ve gotten a 2-4% merit increase every year and as soon as I got it, I would always go into my 401(k) and increase my contribution by that exact amount.

I don’t think it’s fair to provide specific guidelines to how much you should contribute to your 401(k) since everyone’s situation is so unique.  One person might have student loans at 6.8% to pay off and another might live in an ultra-expensive city like New York or San Francisco.

I can provide a minimum and a maximum percentage but it’s up to you to determine everything in-between.  If you like the idea of turning $100,000 into $1,000,000 in 40 years without having to do anything other than plopping your money into a basic target retirement fund, maybe you should be closer to the maximum.

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Readers, how much do you contribute to your 401(k) each year?  What percentage of your salary is it?

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Hi, I'm Harry, the owner and head writer for Your PF Pro. I started this site back in 2011 in order to create a place where young professionals could come and get all of their financial questions answered. On the site, you'll find articles on everything from asset allocation for retirement to saving money at Chipotle! So enjoy..

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    • says

      Nice, thanks for the stats. This was the first year I was able to fully max out everything and it felt really good. I get a weird satisfaction out of saving though and I know not everybody feels that way.

  1. says

    I’m maxing out my 401(k) for the third year now! The first year, I just put in enough to get the full match and then I bumped it up quite a bit %-wise to max it out. Every year since then I’ve been lowering it when I get my raise. I’m now down to only 14-16% needed to max it out! :)

    Still maxing out the Roth IRA, using the backdoor now. I’m not sure how many years I’ll have of no Traditional IRAs, so I’m doing this while I can.

    I’m unsure of the HSA, but I’m maxing it out this year. I’ll re-evaluate next year.

    I’m also stashing some money aside in taxable investment accounts that is really labeled for “retirement” and paying the mortgage down a bit too. A bit of everything! All in all, I’m saving about 2/3 of my regular income and 100% of my bonuses.

    I think I would feel like I was just getting by if I was “only” maxing out my 401(k) and Roth IRA and not saving anything more accessible, lol.
    Leigh recently posted…Optimize Efficiently: Credit Card RewardsMy Profile

    • says

      Ok way to come in and make everyone look bad haha. Saving 2/3 of your total income is spectacular though. The great thing about your situation is that you keep making more and you’re also saving more.

      A lot of people tend to disproportionately increase their spending as their income goes up. “Now that I make more, I get to spend more!” as opposed to “Now that I make more, I get to save more!” Can’t force people to save though, they need to have their own ‘investing epiphany.’

      • says

        Hah! My budget is pretty much the same overall as where it was two years ago. My spending is completely separated from earning in my mind. I love being able to save more money with my raises! :D I think it comes too from making so much and not really needing any more than my starting salary… Haven’t you been banking your raises too? ;)

        My savings rate is closer to 3/4 to 4/5 when you throw in my bonuses. I used to save a flat 80% when I was in high school. Maybe I’ll get back there some day :)
        Leigh recently posted…Optimize Efficiently: Credit Card RewardsMy Profile

        • says

          Hmm that’s a good way to think about it. You need to separate spending from earning, I might steal that :)

          Yea I banked my first couple raises, but I won’t be able to do much with my next one other than save it in an after tax account.

    • says

      Oh that’s a good idea. Generally you can find much lower fees/better options in IRA’s so if your company doesn’t match 401k it’s a good idea to fill up IRA’s first.

    • says

      Nice. I try not to consider my company’s match whenever I do my retirement calculations. That way, if I ever switch employers to one that has less of a match or my portfolio goes down a bit, I should still be on track.

  2. jim says

    OK guys, I’m confused – sorry – I’m an old guy. I’ve been investing 20% of my gross income for 26 years but that 20% includes my employer’s match. Is that too little? Should I be doing the 20% of my gross income disregarding the employer’s match?

    • says

      Well if you’ve been doing 20%(including employer’s match) for 26 years you’re probably doing pretty well. In fact, contributions matter less over time for you since they will have a smaller impact as your portfolio gets bigger.

      I tell people to disregard the match when they are calculating their retirement savings since you don’t want to depend on it. Your company could get rid of the match at any time or you could switch employers to one that does not offer a match.

      • jim says

        Thanks for the input. Appreciate it. Since my employer’s match isn’t going any where anytime soon (and neither am I), I guess we’re doing ok. Thank you for your insights.

  3. Jeff says

    Your Employees Savings and Investment Plan and EE Stock Ownership Plan Dollars

    Verify or update your savings rate(s).

    PRE-TAX/401(k) SAVINGS
    Contribution Percentage Annual Contribution
    Eligible Compensation — % $ —

    Contribution Percentage Annual Contribution
    Eligible Compensation — % $ —

    I am confused with this. Can you please explain why there are two options. Seems as if I would always want pre-tax.

    • says

      Right, but there is a limit to pre-tax contributions. For 2013, the pre-tax 401(k) limit is $17,500 and $5,500 for a traditional/Roth IRA. Once you’ve hit those limits, you have the option to contribute more but it will be with after-tax dollars.

    • says

      Hey Jeff, yes you should always contribute to all your tax advantaged space before doing after tax accounts and even then there are other options like an IRA, HSA, I bond to use up before going after tax. I’ll shoot you an e-mail if you’d like to know more.

  4. Danielle says


    I have and IRA and am considering a 401K (my employer does not match). Should I contribute to my IRA (me, directly contributing via my post-taxed paychek) and then when i file my taxes get a refund based on my amount contributed? Or should i contribute to a 401K?

    • says

      Most of the time if your employer doesn’t offer a match it makes more sense to fill up the IRA first since you will have more flexibility and better investment options. If it were me, I’d do IRA with Vanguard as much as I could every year. Then once that’s maxed out, start using the 401(k) space…


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