My daughter just graduated from college and is preparing to start her first "real job." The other day she asked me: "How much money should I put in my 401(k)?"
What is a 401(k) and why is it a good idea?
If your first thought is: "What is a 401(k)?," here's an easy answer: A 401(k) is the most common retirement plan offered by U.S. employers. It works like this:
Your employer pays you a salary. Let's say it's $68,500 -- the average starting salary for U.S. college graduates in 2024. Your employer also offers you the option to reserve part of this salary, say 10% (or $6,850), and deposit this money in a 401(k) retirement plan. Because you don't get the money (right away), you don't pay taxes on it (right away). You'll pay taxes when you withdraw the money from the account in retirement. That's the first big benefit of opening a 401(k) retirement account: You get to defer some taxes.
How much money should I put in my 401(k)?
But now back to answering my daughter's question. You should put as much into your 401(k) as possible.
Why? First, because the more money you put in, the less you pay in taxes. Second, because your employer will often encourage you to fund your 401(k) by offering matching funds. This means that for every $X you put in, your employer will add an additional $Y into your 401(k).
Not every company offers a match, and for those that do, there may be limits. For example, if you're allowed to contribute up to 10% of your salary, your employer may only "match" the first 5%. Or your employer might offer to "match" $0.50 for every $1 you contribute.
But with any match, money in your 401(k) means free money your employer is adding to your retirement.
So put as much money into your 401(k) as you possibly can.
