A 401(k) is one of the most powerful savings accounts for retirement.
In 2024, workers can contribute up to $23,000 ($30,000 if age 50 or older) to their workplace retirement plan. That money will grow tax-free, allowing your savings to compound year after year. That could lead to a massive sum of cash by the time you retire.
If you can't contribute the maximum to your 401(k), that's OK. You can still get the biggest benefit of the account with a much smaller contribution.
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The bare minimum you should be contributing to your 401(k) right now
If you want to make the most of your 401(k), you should be contributing at least enough to get the full company match.
The company match is typically based on a percentage of your salary. For example, your company might match dollar for dollar up to 4% of your salary. Or it might offer to match half your contribution up to 7% of your salary. Or it could offer some combination, like a full match of the first 2% of your salary and then a half match of the next 4%.
A 401(k) company match is the best return on investment you'll find anywhere. You immediately receive a substantial, guaranteed return that no other investment offers.
Since most companies base their 401(k) match on a percentage of salary, the amount each worker should contribute to their 401(k) will differ from person to person. In fact, annual pay raises and promotions mean it's likely the amount you contribute to get your match every year will change (and the amount of your matching contribution will change too).
The minimum still makes a big difference
If you contribute just enough to get the company match, it can go a long way toward helping you build your nest egg.
Take a look at the following example of a worker who receives a dollar-for-dollar match on the first 2% of their paycheck and a 50% match on the next 4%. They start with a salary of $50,000 per year, and they receive annual pay raises of 3%. Assuming their contributions go to a simple index fund, which returns 8% per year after fees, here's what happens when they contribute just enough to receive the company match.
| Years | Value of Individual Contributions | Value of Matching Contributions | Total |
|---|---|---|---|
| 1 | $3,202 | $2,134 | $5,336 |
| 5 | $19,854 | $13,236 | $33,090 |
| 10 | $52,189 | $34,792 | $86,981 |
| 15 | $103,365 | $68,910 | $172,274 |
| 20 | $182,809 | $121,872 | $304,681 |
| 25 | $304,465 | $202,976 | $507,441 |
| 30 | $488,929 | $325,953 | $814,881 |
Table source: Author. Calculations by author.
As you can see, matching contributions can add up to hundreds of thousands of dollars over the course of a long career. And you often don't have to save very much in order to get the full company match.
Sometimes less is more
In many instances, contributing just enough to get the company match is exactly how much you should contribute to your 401(k) -- no more and no less.
That's because many 401(k)s come with substantial fees and limited investment options. Those fees can eat into your savings and completely negate the tax benefits of using a 401(k) in the first place. If your 401(k) has high fees, you should still contribute enough to get the match, but there are several other investment options to consider for additional retirement savings.
- IRA: An IRA offers the same tax benefits as a 401(k), but it comes with the added advantages of being able to avoid fees entirely and a much broader array of investment options. However, contribution limits for an IRA in 2024 are just $7,000, or $8,000 for workers age 50 and older.
- Health savings account (HSA): If you're enrolled in a qualifying health plan, an HSA can be a great way to save for retirement. While it's meant to help pay for qualified medical expenses, stowing your HSA funds in an investment account is a great hack to supercharge your retirement savings thanks to its tax advantages and flexibility. HSA contribution limits for 2024 are $4,150 for those on individual health plans and $8,300 for those on family plans. Those 55 and older can contribute an extra $1,000.
- Taxable brokerage account: A taxable brokerage account can, in some instances, work out better than a 401(k). While you'll owe taxes on any capital gains and dividends, the flexibility and low fees can't be beaten.
Once you contribute the bare minimum -- enough to get your company match -- carefully consider where you'll put the rest of your retirement savings.
