How much should you contribute to your 401(k)?

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You may still be decades away from retirement, but it’s never too soon to ramp up your savings for your life as a retiree. And one of the best ways to do so is to increase your contributions to your 401(k) — or whatever retirement account you have access to — whenever your salary increases.

Why is it so important to contribute as much as you can to your 401(k)? Let’s review the key benefits of this plan:

Tax advantages – By contributing pretax dollars to your 401(k), you can lower your taxable income, and your money can grow on a tax-deferred basis. If you contribute to a Roth 401(k), you put in after-tax dollars, so you don’t get an immediate reduction in your taxes, but your earnings growth and distributions in retirement are generally tax-free.

Employer match – If your employer offers a match, you can think of it as almost a bonus in pay. Matching amounts vary among employers. They are commonly structured as 50 cents on the dollar or a dollar-for-dollar match, usually for 3% to 6% of an employee’s salary.

Ease of contributing – You contribute to your 401(k) through payroll deduction – the easiest way to save. And some plans have an automatic “escalation” feature, which automatically increases your contribution amount for you each year.

Strategies for boosting your 401(k) savings

So, given the various benefits of a 401(k) plan, how much should you contribute each year? If you're just starting out or balancing multiple financial goals, you may need to work progressively toward your retirement savings goal. Consider working toward these three savings milestones:

  1. Start with the match. At a minimum, you’ll want to contribute enough to your 401(k) to earn your employer’s matching contribution if one is offered. It's effectively free money.
     
  2. Work toward saving 10% to 15% (or more) of your income. Everyone's needs are different, but a good rule of thumb is to save at least 10% to 15% of your income toward retirement.
     
  3. Develop a personalized savings goal. While 10% to 15% of income is a great milestone to reach, you'll ultimately want to develop a more personalized savings target that considers how much you've saved, how your assets are invested, your income sources in retirement and the cost of the retirement lifestyle you envision. A financial advisor can help you with this.

To progress toward your next milestone, consider these strategies:

  • Increase your savings rate by 1% each year. In fact, if your employer plan offers an auto-escalation option, you can set it to automatically do just that.
  • Reserve a certain dollar amount or percent of future pay raises, bonuses or financial windfalls to go toward your retirement savings. For instance, promise half of your raise to go to increased retirement contributions or $500 of your tax refund for next year.

Of course, there are limits as to how much you can contribute to your 401(k): In 2025, you can put in up to $23,500 if younger than 50, and generally up to $31,000 if 50 or older.

Beyond your 401(k)

While your 401(k) can and should be a key part of your retirement savings, it likely won’t be the only component. To further progress toward your savings goals, you may also want to contribute to other accounts, including:

  • Health savings account (HSA): If you're covered under a high-deductible health plan (HDHP), you can generally contribute to an HSA, which has triple tax advantages: Your contributions are made with pretax dollars, reducing your taxable income for the year; your earnings grow tax free; and your withdrawals are tax-free, provided the money is used for qualified medical expenses. Additionally, the money in your HSA can be carried over from year to year — you aren’t obligated to “use it or lose it.” Thus, the money could ultimately be used to help pay for qualified health care expenses in retirement — and these costs typically make up a significant portion of your spending needs as a retiree.
     
  • Individual retirement account (IRA): Unlike a 401(k), an IRA isn’t tied to your employer — you can open an IRA at any time through a bank, brokerage firm or another financial institution. As a result, an IRA provides a tax-advantaged way to save for retirement if you don’t have access to a plan through your employer. However, even with a 401(k), an IRA can be beneficial. There are two types of IRAs — traditional IRAs and Roth IRAs. Each may offer you access to products and features that aren’t available in your 401(k). And since you can contribute up to the annual limits for both your 401(k) and IRA, an IRA lets you save even more for retirement than your 401(k) alone. A financial advisor can help you determine how to use these accounts together to maximize your retirement savings throughout your working years.

Ramp up your retirement savings

Increasing your 401(k) contributions whenever your salary goes up can help you make progress toward your retirement goals. And it may also pay off to contribute to the other accounts and retirement saving options available to you. A financial advisor can review your situation and help recommend the right combination of moves for you. Contact us today for a complimentary, no-obligation consultation.