Contributing 10% of your pre-tax income to a 401(k) is considered a good, solid foundation for retirement savings, especially if it includes an employer match. While many experts now recommend 15% to ensure a comfortable retirement, 10% is a strong starting point that provides significant tax-deferred growth.
Yes, contributing 10% to your 401(k) is generally considered very good, often a solid baseline, but aiming for 10-15% (including any employer match) is a common expert recommendation for a comfortable retirement, with more being better if you start later or want to retire early. The key is to contribute enough to get the full employer match (free money!) and build towards that 10-15% goal, increasing your percentage over time.
Aim to save at least 15% of your pretax income each year for retirement (including employer contributions). This can be in a 401(k) or another retirement account. Contributing early can help you get the most out of your 401(K).
How much should you be saving now? As a starting point, consider a general benchmark of saving between 10% to 15% of your pre-tax income. The earlier you begin investing for retirement, the more time your accounts have to potentially grow through compounding returns.
It depends on your risk tolerance, goals, and investment vehicles. Very, Very generally speaking, over 10% annually would be very good/ excellent, 6 to 8 would good to above average, 3 to 5 would be average.
4 common 401(k) mistakes to avoid
The top ten financial mistakes most people make after retirement are:
The 50/15/5 rule is our simple guideline for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, aim to save 15% of pretax income for retirement savings (which includes any employer contributions), and keep 5% of take-home pay for short-term savings.
Financial pundit Dave Ramsey's advice to pause 401(k) contributions while paying off debt forfeits employer match dollars and halts compounding growth. Staying invested through market downturns is a way to avoid missing the reward of the market rebounding.
Taking out money before age 59½ usually triggers a 10% early withdrawal penalty, on top of income taxes. However, if you wait to withdraw until after age 59½, your withdrawals will be penalty-free.
Choose stocks over bonds
That's the advice from Morningstar's Noonan. Stocks historically have returned 10% annually, which enables your money to double every seven or so years or so.
Here are the most effective ways to earn money and turn that 10K into 100K before you know it.
You enjoyed the ability to not pay taxes when you were saving but when it comes time to use your money, your contributions and all growth on your investments will be taxed as ordinary income. A large pre-tax retirement account will increase your Required Minimum Distribution (RMD) calculation.
A Roth 401(k) doesn't make sense if you expect your tax rate to be lower in retirement than it is now, as you'd prefer the upfront deduction of a Traditional 401(k) for bigger savings, though high earners can always contribute to a Roth 401(k) (unlike Roth IRAs) if their employer offers it, making the choice purely about tax-rate arbitrage between current and future income brackets.
Yes, Dave Ramsey strongly recommends choosing the Roth 401(k) option over a traditional 401(k) if your employer offers it, prioritizing its tax-free growth and withdrawals for a significantly larger retirement nest egg, though he still emphasizes getting the employer match first and using Roth IRAs to complement savings. He believes the Roth's ability to make all withdrawals tax-free in retirement makes it mathematically superior, allowing your money to go further.
What Is the Hierarchy Trap? Most 401(k) and retirement plans have rules about which investments are sold when you take money out. Ideally, you'd get to directly choose which funds to tap, or the plan might pull money out pro rata (meaning proportionally from all your investments).
Suze Orman's key retirement advice emphasizes starting early (15% savings from age 25), prioritizing Roth accounts for tax-free withdrawals, maximizing employer matches, waiting until age 70 for Social Security, building a large emergency fund (2-3 years' expenses after 50), and considering home equity (reverse mortgages) for income if needed, all while living below your means to save more today for less spending tomorrow.