Rule of Thumb 1:
Should I Contribute enough to max out any employer match?
This rule applies to 401k participants at every age. If you make $40,000 and your employer offers a 50% match up to 6% of salary, you should contribute at least$2,400 to get the full available $1,200 employer match. Failure to get the full employer match is the equivalent of throwing retirement savings away. Employer matches are fast going away in this recession economy as companies pare costs.
If you're lucky to still have an employer match available to you, be sure to take advantage of the opportunity. A 25 year-old could expect to have about $460,000 more in retirement savings at age 65, by fully leveraging the employer match. This 401k calculator allows you to compute amounts for your own situation.
Rule of Thumb 2:
Should I Save a percentage that represents half my age?
If you're 20, save 10 percent; if you're 40, 20 percent; if you're 50, 25 percent, etc. This rule is particularly useful for people later in their careers who need to catch-up on retirement savings.
For example, a worker who saves 10% at age twenty and consistently maintains this savings level over a their career would likely accumulate an adequate nest egg at retirement without needing to ramp up contributions to 20% at age 40, etc.
Rule of Thumb 3:
Should I Save 10% for basics, 15% for comfort, and 20% to escape?
This rule of thumb comes from Rule 1, applies to 401k savers of all ages, provided a retirement savings plan is started in your twenties.
Late savers can adjust the savings rates proportionately using Rule 2 for the basic level:
at age 40, save 20% for basics, 30% for comfort, and 40% to escape.
at age 50, save 25% for basics, 37.5% for comfort, and 50% to escape.
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