The first thing to do: Simply start saving. Don’t worry too much about the precise amount. Whether you start off saving 1%, 2% or 20% of your salary, getting that money into a tax-friendly account like a 401(k) is a crucial first step for your retirement-saving success.
Even if you’re also trying to pay down student loans or other debt, getting started saving just a little bit now for retirement is a smart idea. The longer your money has to grow, the less you have to contribute over time. Why not let compound growth do some of the work for you?
In an ideal world, we’d all be independently wealthy and not need to save at all, right? If only. Absent a hefty trust fund, the next best thing is to contribute what you can comfortably get into your 401(k). Read on below for some ideas to figure that out.
But keep in mind, there’s a maximum contribution amount, set by the IRS each year. For 2024, the maximum you can contribute to your 401(k) is $23,000 (if you’re 50 or older, you get to put in an extra $7,500 catch-up contribution). The annual maximum is solely for your own contributions; if your employer offers a match, that’s not counted in the individual maximum.
But for a lot of us, hitting the $23,000 max isn’t possible on our current salary. So here are some things to consider as you figure out the contribution amount that works for you.
1. Get the employer match
First things first, you want to do your utmost to get the full employer match (assuming your employer offers one). That match is free money. You’re not going to find that kind of return on any other investment, so be sure to contribute enough to max out the match.
Employers differ in how they match your money. A common type of match is 50% of your contributions up to 6% of your salary. That “50%” means that if you put in, say, $1,000, your company will throw in $500.
The “up to 6% of your salary” is key: You want to set your contribution rate to at least 6% to get the full match. For example, if you make $75,000 per year and you contribute 6%, that’s $4,500 a year you’re putting in (or about $173 a paycheck if you get 26 paychecks a year). With a match formula of “50% up to 6%,” your employer would then contribute $2,250, and you’d be maxing out your match. Well done.
You can always contribute more. But your employer’s max in that scenario would be $2,250 a year, even if you contribute more than 6% of your salary. Now, if you set your contribution rate at less, your employer would also contribute less. Say that, instead of 6%, you set your savings rate at 4%. If your salary is $75,000, then that’s $3,000 you’re putting in your 401(k) every year. Now your employer is going to contribute just $1,500, i.e. half of what you contributed.
To get as much as possible of that free money, set your savings rate to be at least as high as the “up to X% of salary” rate in the employer match formula, OK?
2. Consider an IRA
Once you’re getting your full 401(k) match, if you have more money you’re ready to stash away for retirement, you have a decision to make. You could, if you like, open an IRA (aka individual retirement account). An IRA is similar to a 401(k), with two big differences: You open your IRA at any broker you like, and you get to choose from pretty much any investment under the sun.
If you like your 401(k) — which you should if it offers a decent selection of low-cost investments — then there’s no reason to take the extra step of opening an IRA. But if your 401(k) is less than ideal, then you might want to stash your extra money, after getting that full employer match, into an IRA. IRAs don’t offer matches, but if you have a not-great 401(k), they can be a good additional savings vehicle.
