How Much Should You Contribute to a 401(k) if There Is No Match?
Since the economic downturn, many companies are looking for ways to save money. One way of accomplishing this is to eliminate company matches on employee 401(k) plans. However, just because your company has stopped matching your savings doesn't mean you should stop contributing. The exact amount you should contribute will depend on personal factors such as income level, current savings and the number of years before you retire.
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Reasons Why You Should Still Contribute to a 401(k)
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Despite not having a company match, there are still several reasons why you should contribute to a 401(k) plan. For one, any contributions you make will lower your taxable income. You'll also benefit from tax-deferred growth. Over time, you'll be able to increase your savings without worrying about paying taxes on them. Then, when you do pay taxes on them at the time of withdrawal, you'll likely be taxed at a reduced rate as long as your retirement income qualifies you for a lower bracket. Another benefit is that your contributions will be automatically taken from your paychecks.
401(k) Disadvantages
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When deciding how much you want to contribute to your 401(k), or whether you want to contribute at all, you'll need to consider the potential disadvantages. One negative aspect of many 401(k)s is that they can cost you extra in terms of expenses and fees. If your plans fees are higher than you'd spend investing on your own, you may want to consider alternative options such as investing in an IRA. Also, you'll want to keep in mind the contribution and income limits associated with each type of account.
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What You'll Need for Retirement
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A typical retirement goal is to retire at the age of 65 with a minimum of 80 percent of your preretirement income. You can find many retirement calculators online that will assist you with figuring out what you'll need in your situation. For example, CNN Money offers a calculator that takes your current age, annual salary and savings into consideration before making a contribution recommendation.
To demonstrate, say you enter 35 for your age, make $50,000 per year and have $20,000 in savings. After plugging these numbers into the calculator, you'll find out that you'll need to save $5,400 per year at a rate of 10.8 percent to reach your retirement goal.
Contribution Strategy
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A common retirement contribution strategy is to initially split your savings evenly between a 401(k) and an IRA, or Roth IRA if you qualify, until your IRA is maxed out. A minimum of 5 percent of your annual salary is usually the recommended starting point. If your budget allows you to save even more after your IRA is maxed out, you can deposit those additional funds into your 401(k). You should note that many employers only allow their employees to contribute up to a certain percentage in their 401(k) plan, a typical figure being 15 percent.
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References
- Money Under 30: How Much Should Be in Your 401(k) at 30?
- Cash Money Life: Should You Contribute to a 401k Without an Employer Match?
- CNN Money: A No-Match 401(k) -- Still Worth It
- MSN Money: No 401(k) Match? Save Anyway
