Are your 401(k) contributions keeping up with your salary?

You may still be a few 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 goes up.
You may even see a bigger boost to your salary. U.S. employers gave an average 3.4% raise to their workers in 2022, according to a survey from Willis Towers Watson, a risk management and insurance brokerage company. Of course, your salary increase may be less – or more – than this amount. Either way, a good strategy is to put at least some of that salary boost to work in your 401(k).
Why is it so important to put in 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, so you can increase your contributions with just a few clicks on your computer or smartphone.
So, given the various benefits of a 401(k) plan, how much should you contribute each year? You'll want to balance how much you contribute with other goals you may have, like building an emergency fund or paying down debt. A financial advisor can help you with this. And of course, there are limits: in 2023, you can put in up to $22,500 to your 401(k), or $30,000 if you’re 50 or older. In addition, some employers allow you to contribute additional after-tax dollars. Earnings on these after-tax dollars are tax deferred and you may be able to convert them to Roth assets so that future earnings are tax free. You'll have to check with your employer to determine your options.
Start with the match – At a minimum, you’ll usually want to contribute enough to your 401(k) to earn your employer’s matching contribution if one is offered.
Work toward saving 10% to 15% (or more) of your income – Everyone's needs are different, but a rule of thumb is to save 10% to 15% of your income toward retirement. If you want a more personalize savings goal, a financial advisor can help determine how much you need to save to achieve the retirement lifestyle you've envisioned. If you're not saving enough today, consider these strategies:
While your 401(k) can and should be a key part of your retirement savings, it likely won’t be the only component. To help further improve your financial situation during your retirement years, you may also want to contribute to other accounts, including these:
Increasing your 401(k) contributions whenever your salary goes up can help you make progress in pursuit of your retirement goals. And it may also pay off to contribute to the other accounts and retirement vehicles available to you. Your financial advisor can review your situation and recommend the right combination of moves for your situation.
Important Information:
Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P., and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C.