How Much Should I Contribute To My 401k
Here are some of the key take-aways from the video “How Much Should I Contribute To My 401k?”
– 61% of retirement plans feature automatic enrollment
– Two-thirds of those plans automatically increase 401(k) deferrals
– Those auto-enrollment plans increase deferrals at a rate of 4% or higher
– 98% of plans use a qualified default investment alternative, usually a target-date fund
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Vanguard Report: How America Save
How Much Should I Contribute To My 401k – Transcript
Vanguard recently released their 2025 “How America Saves” Study.
They compiled all the data that they have from their retirement plan savers in 2024 and broke it down. And a couple interesting data points that I want to start out with here.
61% of retirement plans on Vanguard’s platform have an auto enrollment feature.
Two thirds of those plans that auto-enroll, also automatically increase deferrals, whether that is employer contributions increasing – or employee contributions, set to automatically increase.
And 61% of those auto-enrollment plans do so at 4% or higher.
So this begs the question: “what’s the right way to figure out how much you should contribute to your 401k?”
How do I figure out my 401k contributions?
If you want to just roll with the auto defaults of your plan, that’s great.
But if you don’t want to, and you want to figure things out for yourself, I’ve got two ways for you to do that here.
The first is to figure out how much you can do by doing your cashflow numbers.
You want to reference your paycheck.
I don’t think a lot of people get physical copies of their paycheck anymore. But you can probably find one online or ask your HR representatives to show you how to do that if you don’t know.
So on your paycheck, you’ll see a couple numbers that I want to highlight.
The first is your gross income.
Then you’re going to see federal, state taxes taken out, (then) Medicare contributions, social security contributions, maybe pension contributions if you’re in the public sector. And then, you know, you’re probably paying for healthcare somewhere along there too.
Underneath all that, you’ll probably see 401k savings.
Um, so this is where you’re going to see the dollar total of what you’re contributing to your 401k.
So you take your gross income. Let’s say it’s $5,000 per pay period. And you, you’re saving 4%, uh, contributing 4% into your 401k.
That’s $200 per paycheck. If you get paid twice monthly, that’s $4,800 per year.
You’re also want to consider, the cadence of your payment.
Is it biweekly?
Is it twice monthly?
Does it fluctuate?
Is it seasonal?
You want to, you know, take all of that into account. So, you know, obviously, your gross income, you subtract all of that other stuff out and you get your net income.
That’s your take home pay. That’s what’s direct deposited into your bank account.
You want to leave enough for yourself to pay the bills, and save outside of your 401k live. Live, live your life the way that you want to live it, pay down debt. But if you have some wiggle room there, consider bumping it up over that 4%.
The second way to do it is to aim for a big round number.
Let’s say you think that you need $2 million in investments by the time that you are 65. You can back into how much you need to contribute today, in order to hit that target.
So let’s say you’re 30 years old, you want to retire at 65. Uh, you have 35 years to do that.
Now, nothing is guaranteed in the market, but for this example’s sake, we’re going to use 7% per year.
Again, that’s not a guarantee or anything like that, so please don’t mistake it. It’s about average.
So 35 years, 7% return per year on your investment, you want $2 million at the end?
You need to save about $1,200 per month.
Now is that too much?
You don’t want to leave yourself strapped for cash flow. You need to live your life, pay your bills, pay your debt. So, you know, you can always up that contribution later down the road.
One other thing to consider when making, 401k contributions is “where are your contributions going into?”
“What are they being invested into?”
According to the Vanguard study, 98% of retirement plans now designate a qualified default investment alternative, QDIA, (in many cases) this is a target date fund. That’s great. Because that means you’re being invested in a mix of stocks and bonds depending on when your future retirement date is going to be.
There was a story recently in the New York Post about how a big pension fund liquidated their – a big position, in their fund.
(They did this) because they thought they were going to have to pay it out. But they didn’t end up needing to pay it out, but they also didn’t reinvest the cash. And, they estimated that it cost them $80 million over 2023 and 2024… just by sitting in cash.
So most important thing for your contributions in your 401k plan is to make sure they’re not sitting in cash, because that’s the whole point of investing in 401k is to have exposure to the market and growing for the long term.
Obviously, on a personal level, you want to have enough cash outside of your 401k plan. To, you know, let you sleep at night, pay the emergency bills. Um, it really does play a role in your psychology and frees you up to invest for the long term. Which is what we’re doing with the 401k plan. This is retirement money.
This is money needed later down the road. Um, so bunch of things to think about here. But the Vanguard Retirement Survey? My big takeaway was that American Savers are in a good spot.
So let’s keep that going.
Thanks for watching “How Much Should I Contribute To My 401k?”
