With 2024 representing a new year and a new opportunity to maximize 401(k) contributions, the question for 401(k) plan savers is a straightforward one: How much should you be contributing to your 401(k) plan in 2024?
While retirement planning and investment experts say that number is unique to a saver’s personal situation, there are specific steps 401(k) plan participants can take to optimize their retirement plan contributions.
[New 401(k) Contribution Limits for 2024]
2024 401(k) Contribution Limits
By law, 401(k) plan contribution limits are adjusted every year. It’s a good idea to know those limits and plan your 401(k) contribution strategy accordingly.
In 2024, the limit on employee elective deferrals for 401(k) plans is $23,000, with those age 50 and older able to make an additional $7,500 in catch-up contributions.
How Much Should I Contribute to a 401(k)?
While the amount of money you invest in a 401(k) each year depends on your unique financial circumstances, the more you can invest, and the more you take advantage of employer matching contributions, the better.
“Try to invest as much as you can in your 401(k) comfortably,” says Shinobu Hindert, a certified financial planner and author of the book “Investing Is Your Superpower.” “A rule of thumb is to contribute 15% of your current income. Start with a percentage you’re comfortable with, and put a reminder on your calendar every three months to see if you can increase these contributions by 1% to 3%.”
Even if you’re unable to save that much right now, strive to save aggressively in the future.
“Set a contribution goal for the year that’s a bit of a stretch for you,” Hindert says. “See what you can do to reach it — this will keep saving for retirement top of mind for you throughout the year.”
[READ: How Much Money to Have Saved for Retirement by Age 40]
Qualifying for a 401(k) Match
To find out if you qualify for an employer match, 401(k) savers should check with their human resources department and review the 401(k) plan contract details.
“Employees can make sure to set automatic 401(k) contributions to satisfy matching criteria,” says Lei Deng, a certified financial planner at Core Planning in St. Louis. “For example, if your company offers 50% matching (contributions on) up to 6% of your salary, then make sure you update automatic contribution in your 401(k) portal to save at least 6% of your salary annually.”
“That way, you’ll get the full match of 3% of your salary,” she adds.
How to Max Out Your 401(k)
Investing experts advise taking these action steps to maximize your 401(k) contributions.
Try the 1% Challenge
Here, the idea is to incrementally increase your contributions over time.
“Try diverting an additional 1% of your paycheck into your 401(k) each month,” says Jeff Rose, a certified financial planner and founder of GoodFinancialCents.com, a money management advisory platform. “It’s a subtle shift that might not heavily impact your monthly budget but can accumulate to a substantial amount over time, especially with the magic of compounding interest working in your favor.”
Pair the 1% Challenge With the ‘Round Up’ Rule
Every time you make a retail purchase, round up to the nearest dollar and set aside the spare change.
“At the end of each month, contribute that extra change to your 401(k),” Rose says. “You might be surprised how those pennies and dimes can add up across a year.”
Digital “coin jars” from mobile app developers such as Acorn, Greenlight Max and Chime can help with your round-up strategy.
Start Early and Be Aggressive
Start the year off strong by determining the paycheck percentage you can contribute to your 401(k) and increase your contribution by 3% in January. Then, build momentum with more savings throughout the year.
“After a few pay cycles, see if you can maintain this. Or if you need to cut it back you can, but challenge yourself,” Hindert advises. “Chances are, you’re able to make it work each month without that extra money hitting your paycheck.”
Factor in Your Age
Your age impacts at least two factors with 401(k) plan contributions.
— How you invest: In general, younger individuals might incorporate a higher percentage of stocks in their portfolios since they have more time to ride out market volatility. “Older individuals nearing retirement might prioritize preserving their savings and might opt for more conservative investments. such as a higher percentage of bond investments,” Deng says.
— How much you save: If you’re close to retirement age and need to save more, “the catch-up rule is designed specifically for this purpose to allow people over the age of 50 to put away more into their 401(k),” Deng notes.
Increase Savings Rates Over Time
No matter how old you are, focus on boosting your savings rates over the long haul.
“Many of today’s 401(k) plans now have an ‘auto-escalation’ features, where the contribution percentage automatically increases yearly,” Deng says. “Many jobs also give a higher percentage of bonuses as you climb the ranks, so it’s a good idea to also allocate a higher percentage of your bonus into your 401(k).”
Otherwise, it’s a good idea to check your 401(k) contribution at least once a year.
“Ideally, do so during open enrollment,” Deng says. “That’s when you review other employee benefits, or during the beginning or the end of the year, when you plan for the new year or reflect on the progress you’ve already made.”
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How Much Should You Contribute to a 401(k) in 2024? originally appeared on usnews.com
Update 11/06/23: This story was previously published at an earlier date and has been updated with new information.
