A 401k plan can be a great way to save for retirement. In addition to a host of tax advantages 401ks offer, many employers will contribute additional money to your 401k account, free of charge. To take advantage of your employer’s 401k plan, you’ll typically have to contribute a percentage of your salary to it, which they will then match.
The short answer to the question of how much you should put into your 401k plan is: as much as possible. The IRS does limit how much you can contribute on an annual basis, however. Here’s a look at 401k limits and the amount of money you might need to retire on time.
401k Personal Contribution Limits
The IRS sets the maximum 401k contribution limit annually. Although the amount doesn’t change every year, it does increase some years to combat inflation. For 2017, the IRS limitation on elective deferrals — the amount an employee can choose to put into a 401k — is $18,000, the same as 2015 and 2016.
If you’re 50 or older by the end of 2017, you can put an additional $6,000 into your 401k, for a total of $24,000.
401k Total Contribution Limits
One of the main benefits of participating in a 401k plan is that an employer can make contributions on your behalf. However, the IRS limits the total amount that can be deposited into any one 401k account per year. For 2017, the maximum annual 401k contribution is the lower of the following:
- 100 percent of your compensation or
- $54,000 — or $60,000, if you’re age 50 or older
This total contribution limit takes into account your personal elective deferrals, employer matching contributions, employer nonelective contributions and allocations of forfeitures.
Recommended 401k Balance by Age
There’s no single answer for what someone’s 401k balance should be. Two of the most important variables, which vary from person to person, are when you plan to retire and what kind of lifestyle you plan to have in retirement.
You can use a multiplier system to estimate where you might want to be at various ages based on your income. A typical 30-year-old should have the amount of his salary saved for retirement, according to Fidelity Investments. If you’re 67, you should have 10 times your annual salary saved.
Here are the other benchmark savings amounts by age, as recommended by Fidelity:
- At age 35: Two times your salary
- At age 40: Three times your salary
- At age 45: Four times your salary
- At age 50: Six times your salary
- At age 55: Seven times your salary
- At age 60: Eight times your salary
For these savings factors to work, Fidelity assumes you’re saving 15 percent of your annual salary, you invest more than 50 percent of your savings in stocks, and you plan to retire at age 67 while maintaining your lifestyle.
Retirement Savings Guidelines
The idea of contributing to a 401k is to maximize your balance at retirement. As with the recommendations by age, no single number represents the ideal 401k balance at retirement. One of the things you’ll have to factor in is any other sources of retirement income, such as Social Security and the age at which you plan to retire. Fidelity suggests that if you plan to retire at 62, you’ll need to replace 55 percent of your income with savings, whereas if you retire at 67, that number drops to 45 percent.
For example, if you retire at age 67 with an annual income of $100,000, you’ll need to generate $45,000, or 45 percent of your former salary, to fall within the savings guidelines. At a recommended withdrawal rate of 4.5 percent per year, that suggests a retirement savings balance of $1 million.
How to Maximize Your 401k Balance
Although contributing as much as you can is the best way to increase your 401k balance, there are some concrete strategies you can follow to help give your account a boost. One way to make sure you don’t forget to contribute is to sign up for automatic contributions so that your employer automatically takes your contribution out of your paycheck before you even receive it.
Another strategy is to automatically increase your contribution on a regular basis. You’re not likely to notice an increase of 1 to 2 percent in your annual contribution, for example, but over time, you’ll be contributing more and more to your account.
Keep Reading: 6 Ways to Make Your Retirement Savings Last