For a 26 year-old single male, what's a good amount to contribute to 401k?

Question

I don't know a lot about 401k, but I heard that it can lose value. Why would I want to contribute so much money into it if it can lose value?

Answer 1

Generally, try to contribute at least 12% of your income to retirement accounts. At your age, if you just do that, you should be fine at retirement. More specifically, depending on how much you can contribute, you should prioritize as follows:

1) Give at least as much to your 401K as you need to in order to receive your company match. If, for example, your company gives a 50% match for the first 5%, you're going to get a 50% return on that money before it's even invested - that's a better return than you're going to get anywhere else, so don't miss it.

2) Additional retirement dollars should go next toward a Roth IRA. Unlike the 401k, the Roth IRA is funded with after-tax dollars, but taxes are now at an historically low rate, so you're almost sure to be paying a higher tax rate later when you actually start withdrawing. You can fund up to $4,000 this year, and $5,000 per year thereafter.

3) If you still can contribute more, continue to give to your 401K up to the max limit of $15,500. For example, if you a) make $50,000 per year, b) get a 50% match on the first 5%, and c) want to contribute 15% of your income toward retirement accounts ($7,500 total), then you should contribute the first 5% ($2,500) toward the 401k to get the match, the next $4,000 toward your Roth IRA, and then the next $1,000 toward your 401K again. In this example, you've given $3,500 total toward your 401K and $4,000 toward your IRA.

And unless you're making more than about $120,000, you probably aren't going to have to worry about what to do once you max out on your 401K contributions.

As far as taking on risk goes, your return is closely associated with the risk - yes, if you put it all in a mattress, there's no chance of loss. But if you don't take on any risk, you won't even keep up with inflation. So you have to invest in something riskier than a CD. Within your retirement accounts, diversify widely in low-cost broad based index funds. Over the long run, you'll do fine - you've got 40+ years to ride the ups and downs. Good luck.

Answer 2

The maximum amount. You should contribute until, at least, your employer stops matching it. Most 401k will match upto the first 6% of your salary (check with yours, it may be different).

So, if you make $30,000 a year, and your employer will match upto 6%, then you would want to contribute at least $1,800 a year ($30,000 * .06 = $1,800). Divide $1,800 by how often you get paid in a year. Most 401k's allow you to elect to contribute a percentage rather than a dollar amount. What does your employer match?

You may contribute more, the IRS has a limit of $15,000 a year. However, you would want to open a Roth IRA to contribute beyond what your employer matches. You can contribute up to $5,000 a year to a Roth IRA.

I don't remember where I heard this, but I heard a quote saying that if you are not feeling a pinch when you save, then you are not saving enough. Putting an extra $50 a month away for retirement will mean an extra $151,000 when you are age 65 (assumes an 8% annual rate of return). You can afford that if you are willing to dine out 2 fewer times a year. And if you ever have kids, it is going to be much more difficult to put away a large sume of money for retirement.

Answer 3

I'd tell a 26 year old to put away as much as he possibly can. The limit for 2007 is $15,500. Whether you can reach that limit is dependent upon your income and/or how much you're willing to tighten your belt.

The more you put away now the more flexible you can be when you're 48 and your kid is going away to college. You can stop for 4 years and not kill your retirement. Contribute only a nominal amount now and you're stuck...

As for where it goes? Those that say put it into a ROTH are either betting heavily that tax rates are going up or are just saying it because it's "en vogue." Depending on your personal circumstances you could be in a higher tax bracket now then when you retire. If that's the case then suddenly the Roth isn't so pretty is it? Bottom line is that we simply don't know and which way you should go is 100% dependent upon the assumptions but that's all they are...assumptions. Should some go to the ROTH? Yes...but not all or even most. And remember, you often times get better fees/expense offets inside your 401k. If that's the case then I'd hit that as high as I possibly can. A 1/2% expense ratio difference will mean $140k difference in retirement savings. Essentially meaning if you're investing in Institutional class funds inside your 401k and Class A shares in your Roth you'll have more money inside then outside (not even taking the tax considerations).

Answer 4

12% to 15% per year. If you do this consistently (over 10 years) you will have a strong nest egg built up. Also, diversify your investments between Growth, Value, and International. As you get closer to retirement, you will want to increase your holdings in bonds.

Also, don't chase the biggest winners. If you look at last years results, the top performers from '06 probably won't be the top performers again.

Answer 5

the Max. $15500, provided the 401(K) is in a good returning fund.

First put in as much as your employer matches. Then open a Roth IRA and contribute $4000. The come back to your 401(k) and put in until you max out the $15500. Keep in mind this limit is in addition to your employer contribution. The advantage? You dont get taxed until you retire, so the interest generated is compounded tax free.

Answer 6

As much as you possibly can- it adds up fast and plus it's like money you don't ever see and will need in the future. Believe me honey, you WON'T see Social Security... The more the better.

Answer 7

AS MUCH AS YOU CAN! You will be glad you did in the future since you shouldn't count on social security being there.

Answer 8

the max every year of course it can lose money its in the market

Answer 9

The max...especially if your employer is also contributing.

Answer 10

Max it out.