How Much You Should Contribute to Your 401(k)

By ShareBuilder 401k

Understanding How Much to Contribute to Your 401(k)

If you’re thinking about this, you are likely considering how much you need to put away to have enough saved for retirement and/or potentially provide some money to your heirs or estate. Building your retirement savings doesn’t need to be overly complex, and it’s something you can do especially with access to 401(k) benefits. While the ever-changing economic landscape and markets may seem daunting at times, the help of ample 401(k) contribution limits, time, and understanding how much to put towards your retirement plan can help you build a healthy nest egg. In this blog post, we will guide you through the key considerations, target savings, and provide insights on determining the right contribution amount for you. We will also address some frequently asked questions about 401(k) contribution limits, 401(k) withdrawals in retirement, and what happens if you overcontributed to your 401(k) in any given year.

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

Many financial advisors suggest saving 10-15%* of your income over your career for a comfortable retirement. This can be easier if your company’s 401(k) plan offers an employer match as that counts towards this savings percentage too. Plus, a 401(k) match is essentially free money or a bonus if you will.

If you start saving mid-life or later, you may need to save more than 15% of your income to try and catch-up. Regardless of where you are, you can build meaningful retirement savings by assessing where you are and knowing the products, features, and retirement contribution limits as well as understanding some key concepts such as the power of compounding.

Assess Your Current Retirement Savings to See Where You Stand

There are some general saving targets by age that can help you consider how much more or less you may want to work to save. While some tout a retirement number, your goal is unique to you. You may also want to consider other accounts or inheritance you might expect to receive in determining where you stand. Here are some general retirement saving guideposts for reference:

Your Age Amount Saved for Retirement
30 1x Salary
40 3x Salary
50 6x Salary
60 8x Salary
67 10x Salary

You can also run different scenarios with this Savings Calculator.

How Much Will My 401(k) Pay Me Per Month During Retirement?

While the retirement saving targets provide some good context, the monthly income you can expect from your 401(k) during retirement depends on numerous factors, including the total amount saved, income from other sources, the strategy you choose for withdrawals, and how long your retirement lasts.

Also think through how your expenses may change and any other sources of income. Will your home be paid off? Will you downsize houses for added savings? Will you be free of supporting children or encounter aging parent expenses? Do you plan to travel more? Also consider Social Security, an inheritance, dividends from other investing accounts, or a part-time job that may provide you with additional income.

The '4% rule' can serve as a useful guideline of how much your 401(k) (and other investing accounts) might provide you each year in retirement. This strategy suggests that you withdraw 4% of your total 401(k) balance in the first year of retirement, and then adjust that amount each year for inflation. This How Long Will My Money Last calculator can help you further refine how long your savings can last applying various scenarios.

How the Power of Compounding Helps Your 401(k) Contributions Grow

Before discussing tactics to help you boost savings, it’s important to understand the power of compounding. The principle of compounding plays a crucial role in the growth of your 401(k) balance and other investing accounts. This phenomenon describes the impact of earnings (such as interest, dividends, and capital gains) on your initial investment and on earnings from previous periods.

Contributing regularly to your 401(k) helps you take advantage of the power of compounding over your working career. With compounding the interest and dividends you earn on your 401(k) investments are reinvested helping you earn even more over time.

Let's consider a hypothetical example where you contribute $10,000 per year to your 401(k), and your employer provides a match of an added $4,000 per year. Suppose your 401(k) earns an average annual return of 8%. Over 40 years, your total contributions, including your employer's contributions, would equal $560,000. However, thanks to the power of compounding, your 401(k) balance would have grown to nearly $4,100,000! We think that’s pretty cool.

Compounding Chart

Tactics to Help Increase Your Retirement Savings

For most of us once we assess our financial situation, figuring out how to contribute more to build a bigger nest egg is our goal. Here are some tactics that can help you increase your savings:

  1. If it works with your current budget, simply login to your 401(k) and increase your salary deferral amount to your 401(k).

  2. If you don’t have budget at this moment to increase your 401(k) contributions, when you receive your next merit raise or promotion, increase your 401(k) deferral amount by a similar percentage. You’ll be living on a similar or better budget today while saving more for tomorrow.

  3. Ensure you are receiving all of your company’s 401(k) match. If a budgetary issue has prevented you from doing so, do look at ways you may be able to cut somewhere to get this “free” benefit from your employer. It can be a big help.

  4. If you are at least 50 years old, you can take advantage of catch-up contributions. You can save an additional $7,500 per year towards your 401(k) account. See below for current 401(k) contribution limits.

  5. Review how you are investing and see if you have the right strategy and asset allocation that fits you. If you need to learn more on this subject, give this blog a read for perspective.

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

As of 2023, the IRS (Internal Revenue Service) has increased the annual 401(k) employee contribution limit to $22,500, up from $20,500 in 2022. This is due to inflation adjustments based on U.S. cost of living increases.

For those aged 50 or over, 'catch-up' contributions are available. These have been raised to $7,500 for 2023, up from $6,500 the previous year. This means that if you are 50 or older, you can contribute a total of $30,000 to your 401(k) in 2023, excluding any employer match.

401(k) Limits for 2023    
  2023 2022
Employee contribution limit $22,500 $20,500
Annual limit per individual $66,000 $61,000
Age 50+ catch-up amount $7,500 $6,500
Annual compensation limit $330,000 $305,000
Highly compensated employees $150,000 $135,000

What Happens If I Contribute Too Much to My 401(k)?

While for many it can be tough to reach the 401(k) contribution limit, people who over contribute to a 401(k) in a given year can be taxed twice on the amount above the contribution limit plus a 10% early withdrawal penalty if you are under 59.5 years old. There are ways to correct and avoid these costs if done in a timely manner.

Most 401(k) plans are supported with recordkeeping systems that help prevent you from exceeding the maximum you are allowed to contribute to your 401(k) account each year. However, for those that do not, or in instances where highly compensated employees are not allowed to contribute the maximum allowed due to restrictions of the plan design and over contribute, it can be costly. Check with your company plan sponsor to see if you have systems and notifications in place to prevent this, or if you need to do something additional to stay on top of this.

Key Takeaways:

  • Strive to save at least 10-15% of your income for retirement, but the exact figure should align with your financial circumstances, when you start saving, and your goals.

  • The income you can expect from your 401(k) during retirement will depend on your total savings, withdrawal strategy, other sources of income, and retirement duration. The 4% rule can be a helpful guide to get an idea.

  • Assess your situation and how much you might expect to withdraw in retirement, and then apply 401(k) tactics such as receiving your employer matching contribution, using catch-up contributions, and/or adjusting your investing strategy to get on track.

  • The power of compounding can significantly amplify your 401(k) savings over time, emphasizing the importance of starting as soon as possible and contributing regularly.

  • For 2023, the 401(k)-contribution limit is $22,500, and those aged 50 and over can contribute an additional $7,500 as a catch-up contribution.

  • Over contributing to your 401(k) can lead to double taxation of the excess contributions. Ensure your company’s provider has the systems in place to avoid this.

By taking the time to understand your financial situation and retirement goals, you can determine the right 401(k) contribution deferral amount for you. Remember, it is not just about contributing the maximum amount allowed, but about contributing an amount that aligns with your unique financial circumstances and goals. And of course, the earlier and more regularly you start contributing, the more time you give your money to grow through the power of compounding.

Performance Not Guaranteed: Why Investing (like life events) Is Not Guaranteed

Markets are unpredictable. Stocks and/or bonds may do well one year and bad in another. An economic event may occur. There are so many things that cannot be forecast. If you believe in innovation and the ability for businesses to grow, over the long term, investing in the markets can build you much greater savings than holding all your money in cash.

**Industry experts generally agree that, depending on when you begin contributing, a minimum contribution of 10-15%, will be necessary to reach a goal of 8 to 10 times your ending annual salary prior to retirement. You may want to review your current contribution level to determine whether you believe it is sufficient to meet your retirement goals. There is no guarantee that contributions at this level will result in sufficient funds to meet those goals. *


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This is not meant to be tax advice. ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.