How to Set Your 401(k) Contribution Targets

Benefits of a 401(k) Plan

In general, over a working life, people tend to put an average of between 8 and 9 percent of their income into their 401(k)s. They aim to save enough to ensure that their total retirement income, including social security and any other sources of revenue, amounts to about 80 percent of pre-retirement income. But how should you set your 401(k) Contribution Targets?

If your last salary is $80,000, for example, you’ll want to retire and be able to enjoy an income of about $60,000 altogether. That’s your goal. So how much would you have to save to generate that income?

It’s possible to come up with a quick back-of-the-envelope calculation. In general, experts estimate that someone who retires at the age of 60 should have about 15 times their annual after-tax retirement expenses. If you’re hoping to live on $60,000 a year, you’ll need to have saved $900,000.

Few people, though, retire at 60. But you’re not much better off if you retire at 65. You’d then need 13 times your annual after-tax expenses. So that’s $780,000. To find out how much you’d need to save each month to reach that goal, you can use a savings calculator.

If you’re 45 and you’ve already saved $100,000, for example, you’d need to put aside about $1,270 each month at an annual yield of 5 percent. If you’ve only saved $50,000, you’d need to save about $1,600 a month.

But it’s a little easier than that. You’ll also have income from Social Security.