How much should I have in my 401(k)? (2024)

Does your employer offer a 401(k) plan? If it does and you’re not participating, go ahead and chalk it up as a big financial mistake.

That may sound harsh, but your employer-sponsored 401(k) plan could be the missing foundation of your retirement savings strategy.

Mechanisms like automatic payroll deductions make retirement saving an easy process, once you wrap your brain (and your budget) around having a little less take-home pay.

Eventually, the amount you contribute will add up, hopefully resulting in a healthy 401(k) balance and a nice, tax-advantaged basis for your retirement.

What is the average 401(k) balance?

To see how your 401(k) stacks up against peers in your age and income group, compare your retirement plan balance with the latest data on defined contribution plans published by Vanguard.

Data from Vanguard’s How America Saves 2023 report, published in June 2023, are shown in the following tables.

Vanguard defined contribution plan account balances by age

Vanguard defined contribution plan account balances by income

The basics of 401(k)s

If you work at a large company, you almost certainly have access to a 401(k) plan that allows you to contribute a portion of your pre-tax salary to a tax-advantaged investment account. While big corporations routinely offer these plans, any size company can sponsor a 401(k) plan for its employees.

The not-so-catchy name comes from the section of the US tax code that outlines how these plans operate.

Here’s a breakdown of the plan’s basics:

• Employee contributions: You may opt to contribute a percentage of your salary, subject to annual limits. Those limits are set by the Internal Revenue Service (IRS), so there’s nothing you or your employer can do to increase them. Contributions are made on a pre-tax basis, meaning they’ll reduce your taxable income for the year.
• Employer contributions: You’ll find that many, but not all, employers offer a 401(k) match. If you work at a company that offers a match, your employer will contribute a certain percentage to your 401(k) account, usually pegged to your contribution percentage. This is essentially free money that boosts your retirement savings.
• Tax benefits: Contributions and investment gains in a 401(k) grow tax-deferred. Taxes are only paid when you make withdrawals from that account, typically during retirement when the account holder may be in a lower tax bracket. The age for penalty-free withdrawals is 59 1/2.
• Investment options: You’ll find that mutual funds are typically the most common investment options in 401(k) plans, although some now offer exchange-traded funds as well. Both types of pooled investment vehicles track baskets of securities, such as equities or fixed-income assets. The fund options generally include domestic and foreign securities, as well as large-cap, mid-cap and small-cap stocks.
• Portability: If you change jobs, you can roll over your 401(k) into an individual retirement account (IRA) or the 401(k) plan of your new employer.

Determining how much to contribute to your 401(k)

To determine how much to contribute to your 401(k), consider factors like your financial goals, current income and retirement timeline. The more you can contribute, within IRS rules, the better, as that will grow your nest egg while also increasing your tax advantage.

To maximize the benefit from your employer, aim to contribute at least enough to get the full match your company offers. For example, if your employer contributes 3% of your salary to your 401(k) account, at least hit that mark to receive the full match. It’s an easy way to pad your retirement account.

As your salary grows, consider increasing your contribution, allocating around 10% to 15% of your income if possible.

Benefits of maximizing your 401(k) contributions

By contributing the maximum allowed amount, you’re using the power of the 401(k) to its fullest.

Sure, that does mean you’re pulling some money away from funding your life today, which might not be comfortable. However, if it’s at all possible, salt away a little more than you may initially want to. You can increase the contributions over time as you get used to more of your paycheck going into savings.

The more you put into your account, the greater the reduction of your taxable income, which will offset some of the pain from taking home a smaller amount.

This disciplined saving approach harnesses the power of compounding over time, meaning you’ll continue to earn returns on the interest and returns you’ve already earned and amplify the growth of your investments. Additionally, maximizing your contributions often aligns with employer matching programs, increasing the impact of your investments.

Risks associated with 401(k) investments

You’ve heard it before: Investing comes with risks. That’s as true of a 401(k) as it is of any other investment account.

Market volatility, or fluctuations in asset prices, can affect returns and may impact the value of your portfolio. Economic downturns may also lead to losses. Poorly performing investments and high fees can erode savings.

Many 401(k) investors allocate their accounts without much thought, choosing funds that did well in the past year, for example. That’s often a weak strategy, as the asset classes or market sectors that performed well last year won’t necessarily lead this year or next.

Be sure to diversify, and avoid the mistake of overlapping funds that hold substantially similar stocks.

How age affects your 401(k) contributions

Your 401(k) balance is largely tied to your age and the stage of your career.

In the early years of your working life, contributing a higher percentage of income will allow you to capitalize on compounding over time.

As you get older, you may be able to increase your contributions, even taking advantage of catch-up contributions allowed for those 50 and older.

In retirement, you’ll stop contributing and focus on withdrawals and tax considerations.

Using different strategies that align with your stage of life helps optimize your return, balancing growth potential with practical financial needs.

How income affects your 401(k) contributions

Income has a big influence on 401(k) contributions, as these plans are percentage-based. In other words, if an employee who makes $100,000 puts 10% of her income into a 401(k), that’s $10,000 a year. However, another employee making $70,000, also contributing 10%, only contributes $7,000 per year.

Workers with lower incomes may need to strategically allocate funds to accommodate both living expenses and retirement savings.

As your income rises during your career, consider adjusting your contribution levels.

401(k) contribution limits

In November 2023, the IRS increased the amount investors can contribute to a 401(k) plan to $23,000 per year in 2024, up from $22,500.

The catch-up contribution limit for employees aged 50 and over remains $7,500 for 2024, for a total of $30,500.

Those catch-up contributions can help you optimize your account value as you approach retirement age and want to increase your account balance.

If your employer matched your 401(k) contributions, that match doesn’t count toward your employee limit. Together, the limit for your contributions and an employer match is $69,000 in 2024, up from $66,000 in 2023.

Employer matching on your 401(k)

Employer matches on 401(k) plans serve as incentives for employees to participate.

This employer-sponsored benefit involves the employer contributing a certain percentage to an employee’s retirement savings, typically based on the employee’s own contributions, up to a specified limit.

For instance, an employer might match 50% of an employee’s contributions, up to 6% of their salary. This boosts an employee’s overall retirement savings significantly, providing a powerful lever for wealth accumulation.

Employees should aim to contribute enough to maximize this match, as it amounts to free money that can significantly accelerate the growth of their retirement fund.

401(k) withdrawals and penalties

If you make withdrawals from your 401(k) before you turn 59 1/2, you’ll generally face penalties. That’s by design, as the IRS wants to discourage you from drawing down your account early. The idea is to keep the amount of your 401(k) savings growing so it’s available to you in your later years.

Early withdrawals typically trigger a 10% penalty, in addition to regular income tax. Exceptions such as financial hardship or specific qualified expenses may allow exemptions from penalties, but not taxes.

After age 59 1/2, withdrawals are penalty-free, but taxes still apply.