Open Enrollment: How Much Should We Contribute to Our 401(k)?

In order to produce the podcast and keep content up free for you, I work with partners so this post may contain affiliate links. Please read my full disclosure for more info.

Want to maximize your 401(k) this year? The first step is figuring out how much to contribute. Today we discuss how much you need to put in to retire!

How Much Should We Put Into Our 401(k)?

We’re wrapping our open enrollment series!

In the past couple of episodes we’ve discussed what you need to know with your benefits so you can make the right choices for you and your family. 

Health insurance is a huge one, but the other big one is your 401(k).

Last week Matt Miner, a certified financial planner talked a bit about how to walk through and review your benefits including your 401(k)s so if you haven’t already, please listen to that. 

You can check -in with your 401(k) throughout the year, but for many, this is a popular time to check and review their portfolio. 

Since it’s an important part of your finances, today we’re answering the biggest questions couples and families have with their 401(k), specifically how much should we contribute? 

In this episode we’re discussing:

• How 401(k)s work and benefits of having one
• Whether or not you should contribute when you’re in debt
• Figuring out how much you need to contribute

Let’s get started! 

Resources to Stay on Top of Your 401(k)

Here are some resources to make managing your money much easier!

• Best Budget and Money Apps: Personal Capital, Tiller, Mint
• Free 401(k) Analysis: blooom
• Open Up Your Brokerage Account: Vanguard, M1 Finance, Fidelity
• Grow Your Stash Faster: High Yield Savings with CiT Bank
• Jumpstart Your Marriage and Your Money
• A Smarter Way to Think About Financial Decisions
• 401(k) Basics: Everything You Need to Know

Thank You to Our Sponsor Coastal!

Support for this podcast comes from Coastal Credit Union! If you’re living in the Raleigh Durham area and looking to bank better, come check out Coastal today.

If you want to be better prepared financially for retirement, please check out Coastal’s 401(k) Planning Calculator.

Key Takeaways on Optimizing Your 401(k) Contributions

Before we wrap up I want to focus on some key takeaways I got from preparing for this episode:

• Define what your retirement looks like. What kind of retirement are the two of you looking for? Now we can't plan ahead for decades in the future, but we can get a ballpark idea of what we want to work towards. And when you have that idea, you can work backward and come up with a number that you need to shoot or save up for.
• Be aware and grow your savings rate. Your savings rate is a key number to know because it affects how fast you're going to reach your goal for retirement or financial independence. Don't worry about where you start, just begin. You can always nudge it up higher.
• Check-in with your 401(k) and other investments a few times a year. This will allow you to stay on top of your investments without stressing out by constantly checking it and make sure that it's still aligned to your goals.

If you’d like to chat more about your financial goals,  please join us in our private and free Facebook group – Thriving Families.

Hope to see you there!

Why Your 401(k) Matters for Your Retirement 

Investing in a 401(k) has some huge financial advantages both now and down the line with retirement.

Many of the 401(k)s offered at work have your contributions go in there pre-tax. So now only is that more money being contributed, you’re also lowering your taxable income. Double win! 

Another benefit of your 401(k)s is that your company may offer a match for your contributions up to a certain amount. Company matches are basically free money.

Plan details can vary with employers so check first if they offer a match and if so, how much. 

You also want to check and ask to see if you wait before you are fully vested. 

If you leave your company, you can rollover your contributions. You want to find out that you need to work a certain amount of years before you can get the money your employer is chipping in with you. 

Knowing these details will help you figure out how much you want to contribute towards your 401(k). 

Should We Contribute to Our 401(k) If We’re In Debt?

One of the reasons that couples have a problem, figuring out what's the best move for them is because they get conflicting advice.

On one hand, you're hearing about how you want to start investing early, even if it's a small amount.

And then on the other side, you're hearing that you want to get rid of your debt. So, which is the right move for you.

There are a couple of things to consider. The first is what kind of debt do you currently have?

I think we can agree that there is a difference between a low-interest debt, like federal student loans compared to high-interest debt, like credit cards.

Now the two of you have to talk this over, but if you would ask me, I would say, if you have high-interest debts, you want to focus on that first before putting anything in.

Why? Because the interest rate of your debts with your credit cards will make it that much harder to actually start building some financial stability and wealth.

You want to think of it as being in the middle of the Lake on a boat with a large hole on the bottom. You got to fix that problem first.

If you have a lower interest at this is where I want you to run the numbers personally, I just enough to at least get the company match. I would then focus on ways to eliminate that other debt.

Having that company match can be a big boost to your portfolio.
I believe you do have some flexibility with this.

Typically getting the company match, isn't going to be a significant amount of money out of your pocket.

This can be a scenario where you are tackling two goals, paying down your debt and investing for your future.

How Much Should We Invest in Our 401(k)?

That’s the big question isn’t it? Before we get into what you need to consider as a couple, let’s start off with two key numbers:

• What’s your goal?
•  What savings rate do you need to get there?

It sounds obvious, but sometimes we skip over these questions. So let's tackle that first one.

What is your goal? How much do you need in your accounts to be able to retire?

If you go online and use some of the calculators, the traditional ones are going to be based on a percentage of your expenses.

If you've been following on the podcast or on the site for a while, you know, that we like to approach things from the idea of financial independence, and how that's calculated is by looking at your expenses.

How much do you need each year to have a lifestyle that you feel comfortable with during retirement or when you're financially independent?

I feel like this is a better approach because with the traditional calculators, it's assuming that if you make significantly more money, that you're going to automatically spend or quote need to have a higher lifestyle during retirement. And that's not necessarily the case.

In the show notes, I'll include links to episodes. where we devote the entire time on figuring out how much you need to retire.

If you want an easy ballpark number to shoot for, then take your expenses for the year and multiply that by 25. And that would be your nest egg goal or your financial freedom number.

Now the second component is citing what your savings rate is going to be. If you're looking to retire at a more traditional age, and you're going to be trying to focus on saving at least 15, maybe 20% of your income towards retirement.

If you are looking at becoming financially independent or retiring early, then you're going to have to save significantly more.

I have seen families save 30% of their income. And those who are aggressively pursuing financial independence, I've seen them bump it up 50% or even more.

The reason many of them are going that a drastic number is that it's slashing the time that they need to work to hit. Their nest egg number or financial freedom number.

So for example, if you're saving 15%, that's about 31 years of savings to hit your retirement number. But if you are trying to save 35%, it drops to 21 years.

And if you you're saving half of your income, it's 17. Years, even if you want to go with a more aggressive savings rate, don't be discouraged. If you start off with a smaller amount right now.

The annual contribution limit for your 401k, 403(b), and
similar employer-sponsored plans in 2020 is 19,500.

And if you can put that in, that's fantastic, but don't be discouraged if you're contributing less right now, with the exception of what we talked about, dealing with high-interest debt earlier as a guideline, it's better to start now with something rather than wait down the line for the perfect time to jump in.

If you're just getting started and you looking for a goal to shoot for, then I suggest you put in enough to get a match.

If your employer offers it, you can then work towards building up your savings rate to a comfortable pace that allows you to enjoy your current life while still saving up for the future.

You don't have to make these dramatic leaps to invest more. You can talk with HR and see if you can automate increasing your contributions each year.

It can be something as unnoticeable, as an extra 1% a year. And if you get a raise or an extra income boost, then adjust your contributions as well.

This can be a painless way to start building up your savings rate.

Support the Podcast!

Thank you so much for listening to the podcast!

• Spread the word! If you enjoyed this episode and think it can help a buddy get on the path to dumping debt and become financially free, please share.
• Leave a review. Honest feedback and reviews make a big difference and gets the word out about the podcast. Leave your review on Apple or Stitcher.
• Grab a copy of Jumpstart Your Marriage and Your Money. My book is designed for a busy couple to set up their finances in 4 weeks. Get tips and tools that have worked for other couples on their journey of building their marriage and wealth together!

Music Credit

Like the music in this episode? Our theme song is by Gentle Regime. Additional music by Lee Rosevere.