One of the most popular types of retirement savings plans, 401(k) plans are commonly offered through employers and come with special features, such as a company match. Finance professionals recommend taking full advantage of a match program whenever possible.
However, even if you do take full advantage of a match program, you will likely need to save beyond that to achieve your financial goals. Ideally, you will know well before you retire what you need to save to achieve your goals.
Figuring out How Much Needs to Be Saved Each Year
To start, create a retirement budget. While this involves a lot of guesswork, going through the typical expenses in retirement can help you set realistic goals. With a general idea of your required retirement income, you can work backward to figure out how much you need to save now to keep on track.
You can use an online calculator or retirement software to figure out the numbers, but it is often best to work with a financial planner to figure out your target savings based on the expected rate of return. Be sure to think about future tax rates and inflation as you save. Financial planners often use advanced software to factor in all these components, but there are many different methodologies. For example, should the calculation be based on historic or expected returns? What rate of inflation is appropriate? Often, financial planners will run multiple scenarios to help you figure out the ideal amount to save.
A retirement savings calculator can provide a rough number for an annual retirement savings goal. With this number, you can have a better sense of whether you can attain your goals through 401(k) savings and an employer match alone.
As an example, imagine you need to save $5,000 annually to reach your retirement savings goal. Employer matching programs are often based on a percentage of salary, so you will need to do more calculations to figure out the maximum match that your company will provide. If the match is greater than $2,500 in total, then you will be fine with just the match, at least for the time being.
Making the Most of Retirement Savings and the Match
To make the best decisions about your retirement savings, you will need to pay attention to the maximums set on retirement account contributions. Currently, individuals can save up to $19,500 in a 401(k) and continue to receive the tax benefits of the account. Beyond that, you will need to look into other savings options, such as an individual retirement account (IRA). However, it could make sense to use multiple accounts to achieve your goals. For example, you may want to make full use of an employee match and then make additional contributions to an IRA to meet your goals. Several factors go into choosing the best type of retirement account; financial planners can help you identify the ideal vehicle.
Some people may be capable of contributing the entire amount to a retirement fund from their income alone without needing the employer match. In this case, they should ask themselves if there is another financial goal that can be met by utilizing the money covered by the match. For instance, they may be able to pay more toward their student loan or other debt.
Similarly, people without a substantial emergency fund should focus on building it with the match money. Otherwise, they can save more for retirement to begin building a legacy or funnel the money toward other financial goals, such as saving for a major purchase. In the end, taking advantage of a match should not be an excuse to increase discretionary spending.
Checking in on Progress Toward Goals over Time
Think of your retirement savings as an evolving process. While going through the work of creating a budget and a savings plan takes a lot of time and energy, you also need to invest in keeping that plan up to date. As you earn more money or change your marital status, your overall goals may change. Making adjustments sooner rather than later can help you avoid situations where you feel like you need to catch up with your savings. Also, as you get closer to retirement, your projections in terms of return and taxation rates will become more realistic, so you will be better able to gauge your progress toward your goals. Even if your overall goals do not change, shifts in the market can necessitate changes to the overall plan. For this reason, it is important to check in on your progress regularly and not just when major life events occur.