What Percent is Good for 401k? [2024]

What Percent is Good for 401k? A 401k plan is an employer-sponsored retirement savings account that allows employees to contribute a portion of their paycheck pre-tax to save for retirement. The contributions and any earnings grow tax-deferred until withdrawal.

Some key features of 401k plans include:

  • Employers may choose to match employee contributions up to a certain percentage, essentially giving free money towards retirement savings.
  • There are annual contribution limits, set by the IRS, on how much can be contributed to a 401k. In 2023, the limit is $22,500 for those under age 50 and $30,000 for those 50 or older.
  • There are penalties for early withdrawal before age 59 1/2, with certain exceptions.
  • Funds can be invested in various mutual funds, stocks, bonds within the 401k.

The Percent to Contribute to Maximize Employer Match

The most common 401k match is a 100% match on contributions up to 3-6% of an employee’s salary. If your employer offers a 401k match, you should at minimum contribute enough to maximize that free money.

For example, if your employer matches 100% up to 5% of your salary, you would want to contribute at least 5% to your 401k. If you earn $50,000 per year, 5% is $2,500 so in this case your employer would also contribute and match $2,500. That’s like getting a 100% return instantly just by participating in the plan.

The general recommendation is to contribute enough to a 401k to get the full company match before considering other savings goals. That match is hard to pass up as guaranteed free money for retirement.

Contributing for Retirement Savings Goals

Beyond the company match, determining how much to voluntarily contribute to your 401k plan depends largely on your retirement savings goals. Financial advisors generally recommend saving 10-15% or more of your salary towards retirement through 401k, IRA, or other savings.

Here are some common retirement savings benchmarks and recommendations:

  • Contribute 1x your current annual salary by age 30. For someone earning $50,000, aim for $50,000 total saved.
  • Contribute 3x your salary by age 40. For that same $50,000 earner, aim for $150,000 total saved.
  • By age 50, have 6x your salary saved. In our example, $300,000.
  • And lastly 10x by age 60. That would be a retirement nest egg goal of $500,000 saved for our $50,000 earner.

Of course those are general guideposts and reaching those exact multiples may not be realistic for everyone. But using some benchmarks can help provide retirement savings targets tailored to your income and stage of career.

Knowing those retirement savings goals can help determine an appropriate 401k contribution percentage. If currently under saved compared to those milestones, consider maxing out annual 401k contributions if possible to catch up.

Factors that Impact Recommended 401k Contributions

There is no one-size-fits-all answer for the best 401k contribution percentage, as many factors impact how much you should or are able to set aside. Some key considerations include:

Time Horizon Until Retirement

The longer your investing time horizon until retirement, the more aggressively you may be able to invest and save if desired. Starting early can allow more years for compounded investment earnings.

Income Level and Budget

Higher earners may have more discretionary funds to contribute significant percentages towards retirement savings. Lower earners may focus first on near-term essentials before maxing retirement contributions. It’s all individual based on your household budget.

Other Financial Priorities

While saving for retirement is crucial, sometimes other goals take priority — saving for a home, paying off high-interest debt, building an emergency fund, or funding a child’s education. Evaluate all short and long-term financial goals when deciding on 401k contributions.

Employer Plan Rules and Investment Options

The specifics of your employer’s 401k plan impacts how you use it to save for retirement. Review plan literature to know if there is a required minimum to enroll, any vesting schedules, available fund choices to align with your risk tolerance, etc.

Retirement Lifestyle Goals

If hoping to maintain your current standard of living, plan to replace 60-80% of your pre-retirement income from retirement savings, social security benefits if eligible, etc. Contributing more to 401k today helps achieve that goal tomorrow.

Tax Considerations

Since 401k contributions lower current year taxable income, expect to be in a similar or higher tax bracket in retirement, and there are tax savings advantages to maximizing 401k retirement accounts over other savings vehicles.

Adding It All Up – The Recommended Percentages

Taking a comprehensive view with all those factors in mind, here are the generally recommended 401k contribution percentages:

  • At a Minimum: Contribute enough to get the full employer 401k match if one is offered. Don’t leave that free money on the table.
  • Moderate Savings: 10-15% per year including any employer match. So if you get a 3% 401k match contribution, aim for total contributions between company and personal of 13-18%. This follows common retirement advice of 10-15% total savings rates.
  • Maximum Recommended: Contribute up to federal annual limits if possible which is $22,500 per individual in 2023, or $30,000 if age 50 or over. Maxing out contributions takes dedication but substantially ramps up retirement readiness.

Of course personal situations differ widely. Set your target 401k contribution level somewhere between the employer match and federal maximums based on your budget, existing savings, years until retirement, and overall savings goals.

Getting Started with 401k Contributions

Hopefully this provides a helpful overview of recommended 401k contribution percentages. Don’t let uncertainty paralysis you from taking advantage of this valuable workplace retirement savings option.

Here are quick tips to open your first 401k or increase existing contributions:

  1. Enroll in your employer’s 401k plan and start at any contribution level. Even small amounts can accumulate exponentially over time.
  2. Have payroll deduct contributions each pay period automatically so you don’t miss the money right away. Set it and forget it.
  3. Try to increase contributions at least 1% every year until reaching your retirement savings goals. Small incremental changes add up.
  4. View each raise or bonus as an opportunity to also incrementally boost 401k contributions when cash flow permits.

Maximizing your 401k, especially early in your career, sets the stage for long-term retirement readiness and financial health. Use the recommendations and factors above to help determine the right savings rate tailored to your situation.

FAQs Related to the topic of what percentage to contribute to a 401k:

Here are some frequently asked questions (FAQs) related to the topic of what percentage to contribute to a 401k:

What is the minimum I should contribute to my 401k?

At a minimum, contribute enough to your 401k to maximize any employer matching contributions. If your employer offers a 50% match on up to 6% of pay, you’ll want to contribute at least 6% to get the full match. This is free money you don’t want to miss out on.

What is the maximum I can contribute to a 401k?

The IRS sets maximum annual contribution limits on 401ks. In 2023, you can contribute up to $22,500 if you are under age 50 or $30,000 if you are 50 or older. These limits apply to total employee plus any employer contributions.

What if I can’t afford to contribute 10-15% towards retirement?

While financial advisors recommend total retirement contributions of 10-15% of income, any amount you save can make an impact. If you cannot hit that target, contribute what you reasonably can based on your budget today while trying to incrementally increase contributions over time. Even small amounts add up with compounding investment returns.