The following post was originally featured on The Penny Hoarder.
With that in mind, more employers are doing the hard part for you: They're automatically signing employees up for a 401(k) plan.
So, if you've landed a new job lately (congrats!), you may have noticed that your employer automatically signed you up for its 401(k) savings plan. You may also notice the plan automatically allocated your funds based on your age. Your new company possibly even matches a portion of your 401(k) contributions. What a deal! You're set, right?
Nope. Not really.
The key is to understand that your new employer is trying to help you get started with your retirement savings. Now, it's your turn to look things over and make them work for you.
The initial contribution for most employer-sponsored auto-enrollment 401(k) plans is usually 3 percent of your paycheck. While that's better than nothing, it is not enough to get you where you need to be by retirement age.
So How Much Should I Put in My 401(k)?
The first step is to look at your employer's matching amount. If the company is willing to match a portion of your contribution up to 5 percent of your salary, then 5 percent is your bare minimum. If your employer offers no matching funds, you'll need to increase your contribution to compensate.
Of course more is better. Right? But let's be real: You still want to have some money left after taxes, Social Security, and other deductions come out of your check. Answering these questions may help you decide what contribution level is right:
- What kind of retirement do I want? Quiet evenings in the garden or traveling the world?
- How much do I really need in take-home pay each pay period?
- How much, exactly, is 1 percent of my gross pay? Can I do without another 1 percent to fund my retirement?
Keep in mind that as your paycheck grows, your contributions should too. If you get a raise, go in and adjust your 401(k) contributions as well. Ideally, you want to get to 15-20 percent at some point, but set your sights lower and work toward growth.
Employers that automatically enroll employees in a 401(k) aren't the bad guys. They mean well and are creating a way for employees to save for retirement, even if they don't mean to. To get the most out of it, take your retirement planning in your own hands and set your contributions to a higher, yet comfortable, amount.
Now, enjoy your new job and keep saving!