This term was derived from a tax code section or simply from subsection 401(k). This refers to an investment and saving plan sponsored by employers to their employees. It allows workers to save and invest a portion of their paycheck before their taxes are deducted.
This retirement plan is an easy way to save up for your retirement.
With a 401k plan, you can control how you plan to invest your money. Some of the plans include mutual funds, stocks, and money markets. The most common for this is a combination of stocks and bonds which slowly becomes conservative as you retire.
In general, the amount of money you can put in your 401(k) account should depend on your financial status. Several factors can dictate how much you can save which may include:
1. The amount of money you are willing to set aside from your salary.
Experts recommend 10-15% of your income. But if you are self employed you can contribute 25% of your net earnings.
2. Your age.
If you are younger you can start with small amounts, however, financial experts recommend saving as much as possible since there is an advantage to this when returns are compounded over time.
3. How close you are to your retirement.
Play with this calculator to check how you can make your savings grow for your retirement at your current age.
4. Contribution Limits.
In 2020, an individual can contribute $19,500 from $19,000 in 2019. This limit increases up to $26,000 if you are more than 50 years old. Such limitations are set by the Internal Revenue Service and are subject to changes every year.
You can always change the amount of contribution to your 401(k) depending on the limits and based on your income. It is highly recommended that you should not stop contributing and as much as possible avoid getting withdrawals for loans or luxury needs. Remember, this money will save you in your future.
If you think that you are able to meet your short-term financial goals and you want to plan for the amount of money for your retirement, you can:
- Assume that you started working at the age of 22, by the age of 30, you should be expecting a 401(k) fund equal to your annual salary.
- For example, if you receive $45,000 for a year you can target a retirement savings of $45,000. If you successfully achieve this, then by the age of 60 you can have a total savings of $600K from an annual return of 8%.
Or simply put, as you grow older and your salary gets higher, save 15% of it and here’s how much you should have in your 401k: 30’s=1x your salary, 40’s=4x your salary, 50’s=7x your salary and 60’s=10x your salary. This is being optimistic that your career growth will make your salary higher thus, you will be on track of your retirement goals.
How about changing careers? Yes, most young workers aged 20 to 30 years change jobs from one to another and it is sometimes difficult to decide on how much you should set aside especially so that your salary may have changed. The best way is to set an absolute 401(k) savings amount. You can always follow the 10-15% contribution plan whether you have a fixed annual salary or not. A good financial plan will surely answer your income needs when you retire.