5 Key Signs You Need to Put More Into Your 401(k)
Saving money for retirement can be challenging. It can take decades of dedication to stay the course and invest your savings for a future that might be hard to imagine right now. But just because it’s hard doesn’t mean you should ignore retirement planning.
Social Security Cuts: States That Would Be Impacted the Least
Similar: 3 Ways To Recession-Proof Your Retirement
The sooner you start saving and investing, the easier it is to reach your retirement goals due to the power of compound returns. And you can set yourself and your family up for success without making too many sacrifices in the present.
But how do you know if you’re putting enough into workplace retirement plans, like a 401(k)? Consider these five signs:
1. You’re Not Getting the Full Employer Match
One of the best ways to grow your retirement savings is to take full advantage of any employer match you receive. For example, your company might match your retirement contributions on a dollar-for-dollar basis up to 3% of your salary, though some go much higher.
Earning $50,000 per year means contributing $1,500 to your retirement plan, which would also trigger your employer to pay $1,500. Add that up over time, particularly considering compounding investment growth, and it can make a big difference in your retirement balance. So, if you’re not taking advantage of what’s essentially free money from your employer retirement match, that can be a clear sign to put more into your 401(k)
2. You Have a Fully Funded Emergency Fund and No High-Interest Debt
Another way to tell if you should add more to your retirement savings is to assess where you’re at in your financial journey. One popular methodology is Dave Ramsey’s 7 Baby Steps, which provides a hierarchy for saving and building wealth, starting with saving $1,000 for emergencies. From there, the steps include paying off all debt besides your house and saving for a fully funded emergency fund of around 3-6 months.
If you’ve already hit those marks, you might move into Step 4, investing 15% of your gross income for retirement. Remember that not everyone agrees with every detail or the exact order of these steps. However, many experts agree that if you have a good financial base, such as no high-interest debt and a fully funded emergency fund, you can turn more toward retirement savings.
3. You’re Saving Less Than 10% of Your Paycheck
While Dave Ramsey and many other experts suggest saving 15% of your gross income for your retirement, at the very least you should likely be saving 10% if you want a reasonably comfortable retirement. If you’re not, that’s a good indicator that you likely need to invest more money, especially once you’ve taken care of other financial priorities like paying off high-interest debt.
“A good rule of thumb is to try to save 10-15% of your income toward retirement,” says Stanley Poorman, a financial professional at Principal, in an article by Principal.
He adds, however, that while this rule of thumb might work for a 25-year-old, someone just starting to save for retirement at 50 likely needs to save even more. So, you might consider this 10% mark to be a minimum.
4. You Retirement Income Projections Are Too Low
If you need help determining what percentage of your income you should save for retirement to afford a comfortable lifestyle, consider using free retirement income calculators that can easily be found online or through your 401(k) provider. You can plug in a few variables like your current age, projected retirement age, savings rate and projected investment growth to see what your retirement portfolio will translate into regarding retirement income.
If the numbers come back too low, then you may need to put more into your 401(k). As Principal reports, a 1% additional contribution for someone earning $35,000 per year would turn into $187 in monthly retirement income 30 years down the road; 5% would turn into $933 per month. And if you have a higher salary and contribute a higher percentage, the numbers can accumulate quickly.
5. You Want to Reduce Your Tax Bill
Lastly, you should put more into your 401(k) if you have a high tax bill and have room in your budget to save more for retirement.
“Tax evasion is illegal,” says Bo Hanson, co-host of The Money Guy Show, and partner and co-founder of Abound Wealth Management, during a recent episode of The Money Guy Show. “However, tax avoidance is highly encouraged. And we literally have an entire tax code that substantiates this claim.”
He adds that putting money into retirement accounts is one of the best ways to avoid taxes.
Many retirement accounts, such as a traditional 401(k), enable you to deduct your contributions, and those can grow tax-free until you eventually pay taxes when taking distributions from your retirement account. Or, you might have an option to put money into a Roth 401(k), which means you would still pay contributions now but can avoid paying taxes on distributions later. Depending on your tax situation and strategy, either option could save you money.
So, following this approach, along with paying attention to these other signs, could enable you to increase your overall net worth and set yourself up for an enjoyable retirement.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: 5 Key Signs You Need to Put More Into Your 401(k)
