Financial advisors in Illinois constantly face clients asking about the ideal amount to invest in their 401(k). However, there is no one-size-fits-all answer to this question. Although most financial institutions may suggest between 15% and 20% of your income, how much you should contribute to your 401(k) depends on your financial situation.
Other factors that may determine how much you can save include your overall goals come retirement. Your employer’s unique 401(k) plan and the Internal Revenue Service’s limits on making contributions also determine how much you can set aside for retirement.
Any financial advisor will consider these factors before recommending an actual amount for a client. Likewise, considering the following items yourself when determining how much you should contribute to your 401(k) plan may point you in the right direction.
Review the 401(k) plan that your employer offers their staff members. They may have a matching system in place to encourage more employees to participate in the investment plan. What essentially happens during 401(k) matching is that your employer pays the same or a percentage of the amount you contributed to your retirement plan. So, you’re getting free money.
Employers may have 401(k) matching plans for employee retention and recruitment purposes. Companies with established retirement funding plans tend to be attractive to talented employees. At the same time, employers receive tax benefits for contributing to their employee’s 401(k) accounts. So, a matching plan is a win-win situation in any case.
Once you know how much of a match your employer offers, you can adjust the amount of money you contribute to your retirement fund. Even if you cannot contribute to your plan as much as you would want, this matching system may help you achieve your overall goals faster instead of ignoring the potential for free money.
Consider the Internal Revenue Service’s limits on 401(k) contributions when determining how much you should allow for your employer’s 401(k) plan. These limits exist to prevent corporations from creating retirement plans from which only senior executives may benefit. The government department restricts the amount of money an employee can deduct from their income.
As of 2020, you can set aside up to $19,500 in 401(k) contributions. In addition, participants older than age 50 may contribute up to $26,000 ($6,500 extra) to catch up on contributions. Note that some employers may have specific plans that restrict you from contributing the maximum amount.
The money you contribute to your 401(k) depends on your unique financial situation and your overall goals. Some financial advisors in Illinois may suggest contributing up to 20% of your gross income to your 401(k). However, your circumstances may get in the way of your well intentioned retirement contributions.
Consider your company’s 401(k) plan and see if its terms are favorable. You may also make a better decision when you take the IRS’s contribution limits into account. Finally, you can consult seasoned financial advisors in Illinois to assess your unique situation and determine the ideal amount you can contribute without worrying about your retirement funds.
At Hagemann Wealth Management, we commit ourselves to your best interests. We base all our advice on your unique financial information, individual goals, and personal investment experiences. Get in touch with our seasoned professionals to help you find the best financial plan that works in your favor.
*The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All investing involves risk including loss of principal. No strategy assures success or protects against loss.