Newsday
Take it to the max.
That’s the advice many financial experts give when asked how much people should save in their company’s 401(k) or similar defined contribution plan.
Wise words to those who can afford it, but not everyone can lighten his or her paycheck by several hundred dollars a month.
So just how much should one contribute? That can be tough to answer since it means balancing what one can save now with what one will need at retirement.
“Many people have not budgeted (for retirement) as much as they should have,” said Christopher Tuttle, a certified financial planner with Northwestern Mutual Financial Network in New York City.
Many employees choose an arbitrary number, such as 5 percent or 10 percent, Hewitt Associates research shows. The consulting firm recommends setting a savings goal and adjusting the contribution rate accordingly.
To figure out how much to save, look at how much money is left after necessary bills are paid, Tuttle said. Then look at what else is competing for those dollars, such as mortgage payments, children’s college tuition or other big-ticket items. Balance all those needs when deciding how much to sock away for retirement. Remember, participants can always change their contribution levels if they need more money at some point.
If it isn’t an option to contribute the maximum, which this year rose to $11,000, advisers recommend at least doing enough to get the full company match. A typical employer puts in 50 percent of the first 6 percent of salary that the employee puts in.
If money is tight, don’t begin by contributing a large percentage, said Raymond Mignone, a New York City certified financial planner. Those who overdo it are likely to drop out of the plan completely if it causes too much strain.
“Start off with a little bit and see how it impacts your life,” said Mignone. “Let it go for three to six months and then increase it gradually.”
That’s what Laura Walsh did. The math teacher from Nesconset, N.Y., started by contributing only $100 a paycheck into her 403(b) – the defined contribution plan for educational institutions – so she could pay off student loans and credit card debt, with their high interest rates. Over the next six years, she gradually increased her rate to $400 a paycheck. In September, she plans to bump it up to $500, which will bring her close to the maximum.
Walsh, 34, hasn’t determined how much she’ll need at retirement, but she figures she’ll save all she can now, while she’s young and single.
“If I start early, it will allow me to cut back in later years when expenses are higher,” she said.
The income needed during retirement can be difficult to determine, but experts often say it’s about 70 percent of current household income.
Michael Scarborough, who specializes in managing 401(k) assets, recommends setting aside 10 percent of each year’s salary (including the employer’s match) for retirement. To get a handle on how much a 401(k) can provide, try an online 401(k) calendar, which can be found on many Web sites.
One problem is that people don’t start planning early enough, experts said. This robs them of precious time to build up their assets.
Vanguard, which provides retirement plans to many companies, notes that a 25-year-old needs to contribute only $57 a month to reach $200,000 by 65, while a 55-year-old must set aside a whopping $1,093 a month.
“A lot of people just ignore their 401(k) and only take a look at it when they are close to retirement,” said Scarborough, president of The Scarborough Group in Annapolis, Md.
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