How much should I put in my 401k?

Question

I have a debate going with my boyfriend:
How much should I put in my 401k?
The minimum to get my employer to match my investment or the maximum allowed?

I'm 24 years old, I dont really have major "bills" (cell phone, car insurance, and $200 rent) and I live pretty well off of what I make ($25,000 not alot but once again I dont have a high cost of living and I just graduated college a few months ago)

1. My boyfriend says I should only put in what my employer will match and invest the rest on my own (he is 28 years old and has $33,000 in his 401k)

2. My parents say I should put the maximum in allowed, because it is pre tax and I should start a habit of putting it away now so that way I will never miss that income (I wont get used to money and then decide to start investing and have to cut back in other areas) (my dad has over a million in one 401k account)




Any advice?

Answer 1

It depends.

I have seen 401(k) plans all of whose investment options were questionable. A good 401(k) plan is one that offers investment choices that fit various risk profiles, from extremely safe to somewhat speculative (highly speculative would seem to me to be inappropriate for a portfolio of retirement funds, but I see this all the time). It should also offer investments that are appropriate for bull markets and bear markets. It should have investments whose performance correlates well with high inflation, and those which correlate well with recessions.

If it is possible for you to prudently diversify your portfolio not just into different stocks (actually they will tend to be mostly mutual funds), but into different asset classes, and if your investment choices are good, then investing more is essentially "free money" because of the tax deferral.

But do not contribute so much that your personal savings rate takes a hit. Remember that for most intents and purposes that money is tied up for the long term, and early distributions are likely to be both taxed and penalized.

A qualified plan such as a 401(k) plan allows you to put more money away than you can in either a traditional IRA or a Roth IRA. A Roth IRA in particular has some very interesting and useful advantages (remember it is paid for in TAX PAID dollars but there are actually advantages to the deal). Usually, your parents are correct and your boyfriend is wrong. But sometimes an employer-sponsored plan is so bad that you really are better off on your own.

By the way: if you ever switch jobs, and chances are you will, then you can roll the 401(k) plan over to your own IRA, and have more control over the money. You can probably convert it to a Roth account if you like, by paying taxes on it, and then your savings still grow tax-deferred, and you are not taxed on distributions! That is actually a very good deal. With a Roth, you can withdraw contributions (NOT accumulated earnings and capital gains) without penalty if you need to.

It sounds like your Dad is a diligent saver, so you might want to go over your 401(k) plan with him in detail, so that you understand what you are getting. You might also want to talk to a qualified Financial Planner with GOOD REFERENCES.

BTW: you are lucky to have both parents and a boyfriend who, regardless of their differences regarding where to put it, are favorable towards savings. If you spend the money now it is "opportunity cost" which you may dearly regret later. Ready money is like the king's command, and it will both open doors and save you from many sorts of crises.

Answer 2

Considering your youth and your low cost of living, I'd try to put the maximum into your 401k. Do it now, while your bills are low, and you have no kids or mortgage to pay for. You have to remember that being young (time) and compound interest are the biggest factors w/ any investment, so take advantage! Let's say you put the maximum for 10 years now, then put the minimum that they match in there throughout the rest of your career, you'll have a million just like your dad (or close to it) by the time you retire.

Another thing that is crucial is to open up that ROTH IRA like everyone else is saying. I'd actually make this your FIRST priority (above the 401k) because of the tax advantages. If you have to lower your 401k contributions to put money in there first, then so be it. The same thing applies with the IRA (youth and compound interest). The limit right now is 4k per year. I think it changes to 5k in 2008. There's plenty of research material on the web on this subject. Fool.com is one good financial site.

I have a significant amount in my 401k now, but one regret I have is not opening a ROTH IRA right away. I finally opened one this year, and I'm 28. I wasted a lot of good years, but it's better late than never.

Remember what I said. Your youth is your biggest advantage right now, so invest as much as you can. Hope this helps!

Answer 3

Put the maximum amount that will maximize what your employer puts away for you. Then open up a ROTH ira with your bank and put the maximum allowed in there. A ROTH IRA is After Tax Dollars and since you don't make too much anyway ther'es no point in trying to save money with PRE TAX Dollars. The ROTH will allow that money to grow and when you retire you can pull all that money out without getting taxed on it. You will however have to pay taxes on your 401k and a regular IRA when you retire. You are pretty much already in the lowest tax bracket, so putting away money in your 401k won't save you much. Definitely put as much as your employer will max out on since it's free money.

Answer 4

I would put the minimum of 10% into your 401k and then go and open up a Roth IRA and put as much as you can into it....

Do you have an emergency fund set up ?? If not open one up at http://ingdirect.com and put about 6 months worth of gross pay into it .... that way if by chance down the road you happen too need the money in case of an emergency you will have it there ... then you wont have too interrupt your investing ..... always remember too pay what ever you take from the account back too.. Remember a good rule of thumb always pay yourself first.

Answer 5

Hm I am almost in the same boat as you. I went to my bank and asked the personal banker this question. Best bet is to do the amount they match. The 10 percent that the person before me mention might be about right because our taxes (well i have no children) is about 20+ percent so that helps a great deal. But it's how much you can afford to give up. I am in investment mode so I dont miss my 10+ percent

Answer 6

You should put in the maximum you are allowed. At the bare minimum, always put in enough to max the match.

Again, if you can, put in the maximum.

If you can't put in the maximum, a good way to go is to put in, at least, the minimum to max the match, then increase your contribution by 1 percent each year, until you do get to the maximum. The sooner you get to the max, the better.

Answer 7

Only put money in a 401K up to the match. Put additional into a Roth IRA. Contributions to a Roth IRA are not tax deductible, but the money you put in will grow and, if you ever needed some of it, you can always w/draw what you put in w/ no tax consequences.

Answer 8

I just want to chime in that Sanfrancisco gave the correct answer, and everyone else is wrong, including your parents. Get your match, and then fill up a Roth. The tax benefits to you when you retire (when you are in a higher tax bracket) are much better than saving a few bucks on your taxes now (while you are in a low tax bracket)..

Answer 9

I put 14%... occasionally I will lower it, due to life events. But I always go back to 14%. When you get a raise, factor that in. Add another 1-2% per raise. In 5 years, I went from $4000 dollars to $90,000 dollars :).

ALSO, diversify!! Dont get stuck on one roller coaster, you could lose everything. Diversify!!!

Answer 10

Max it IF the investment options in the 401k are good. DO NOT if they are not. If the latter - go with the bf's notion.