How much to put into 401(k)
originally posted: 11/22/2006 reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email asktony@tonynovak.com.
Q: I am eligible to participate in my employer's 401(k) plan and my employer matches some of the contributions. I really don't have enough income to afford to save money but I can probably put a small amount into the account. How much of my salary should I put into the 401(k)?
A: It makes sense to put at least as much as is required to qualify for the full employer match. For example, if the employer matches $.50 for every dollar you contribute up to 6% of salary, it makes sense to contribute 6% of your salary. This means that you make an immediate gain of 50% on your money so even if you need to cash in the account to pay for an expense, you will still be far ahead even if you need to withdraw the money right away. If you commit to a consistent savings of 6% of your gross income with matching contributions over your working career, then you will almost certainly be on the path to financial success. If you wait until later to start, it becomes increasingly unlikely that you will achieve the same level of success. Also keep in mind that contributing 6% of gross pay equates to only about 4% of your net take-home pay. If you get paid every two weeks, this works out to about a $50 reduction in each paycheck for worker earning about $30,000 per year. It seems like an easy decision to give up $50 per paycheck for the probability of lifetime financial security.
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