If you are working and earning income right now, we want to share with you what we think is the absolute most important aspect of your 401k at the moment.
That one thing is your AUTOMATIC CONTRIBUTION RATE to your 401k. We know there are other questions such as whether to contribute pre-tax or Roth or what investments to choose in your 401k. Look for our other blog posts about those topics.
For most people, including you, the decision of what dollar amount or what % of your income to withhold from your paycheck for your 401k has the greatest impact on your future financial well-being.
To get very practical, let us outline three possible scenarios for how much you contribute.
At a minimum, consider contributing 5% of your income. For each $1000 you earn, this is only $50. You may barely miss that money, and you develop an important financial habit. Plus, by contributing 5% of your income, you are most likely going to get the full company match if your company offers it, which is free money.
If you are already contributing at least 5%, consider bumping this up higher and higher until you get to 15%.
Most financial experts recommend getting to where you can save about 15% of your income into retirement accounts as quickly as possible on an automated basis. By doing that, you are more likely to retire or achieve financial independence while you still have plenty of time to enjoy your new freedom.
If you are debt free and have an emergency fund set aside, then this should be your next target.
Now, let’s talk about how to maximize your 401k benefit for wealth building and tax savings:
Very simply, search something like “401k Contribution Limits this Year.” Then you can determine what % of your income or what dollar amount per paycheck will hit those limits for the year.
The maximum contribution limits are set by the IRS, and keep in mind they can change year by year. It’s typically around $20K.
If you’re age 50 or older, you can even contribute up to an extra (approximately) $7K as a catch up contribution as well.
Of course, you are not limited to these three approaches of 5%, 15%, or the maximum. You can choose any amount between zero and the maximum allowable contributions set by the IRS for your age. The goal is to pick one of these three scenarios as your target, and then make a plan to move toward the target as quickly as possible.
So, login to your 401k portal and find the link or tab that allows you to make changes to your automated contribution rate. Someday you’ll be really glad you made these changes right now.
For important disclosure information, please visit RidgelinePrivateWealth.com/routine-disclosures