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How much should I be contributing to my 401k and what is the maximum contribution limit?

As the Baby Boomer generation begins to retire, concerns over the solvency of Social Security is driving interest in 401(s). How much should one save?

¿Cuál es el coste promedio de una residencia pública de adultos mayores en Florida?
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With the economy showing signs of a pending crisis, many workers are wondering how much they should be put away from their retirement -- which for many may not come fast enough!

Currently, inflation has driven personal savings to lows not seen since the 2008 Financial Crisis. In Quarter 2 of this year (April, May, June) personal savings averaged 3.5 percent, down from 8.7 percent recorded between the same period in 2019.

How much should you save for retirement?

How much one can save for retirement often depends on a number of factors, including income and salary, household expenses, and marco-economic conditions. A more important question is how much someone should save for retirement. Typically financial planners recommend saving around twelve to fifteen percent of one’s income on your retirement.

More than half of workers have access to a private retirement account like a 401(k), which is protected from taxation until retirement (Roth IRA’s tax funds as they go in but are not taxed when they are withdrawn). To ensure people do not use these accounts as a tax shelter, the IRS only allows contributions up to $20,500 for 401(k)s.

Are workers saving enough?

In 2021, the US Federal Reserve conducted a survey of retirees and workers to determine how they were saving and whether their “nest egg” was enough when they decided to exit the workforce.

In speaking with non-retirees, a quarter of respondents, twenty-five percent, said they were not saving for retirement. More concerning was that only forty percent stated that they believed their retirement saving was “on track,” with rates for minorities significantly lower than their white and Asian counterparts. Those with disabilities find themselves in the most precarious spot, with only seventeen reporting that they are on track to save what is necessary to survive in their later years.

The fifteen percent benchmark is pretty standard across the financial planning industry and includes funds paid by workers and their employers. For instance, some companies offer a 401(k) plan where they will match the contributions of the workers up to a certain point. CNBC has reported that the most common matching format is for companies to pay in $0.50 for every dollar the worker puts away. In real terms, this means that a person making around $41,000 (US median income), who saves fifteen percent ($6,160), would pay $4,100, with the firm adding on an additional $2,050.

Seniors and Baby Boomers are concerned about their retirement savings

What is additionally concerning is that only forty-seven percent of non-retirees over sixty felt that their retirement savings plan was “on track.” While this is the highest rate by age group, those over sixty are supposed to be closest to retiring, meaning that the number of years to grow their savings is significantly lower. These figures confirm survey data collected in 2019 that found that “more than half of Baby Boomers said [...] that they need to catch up on their retirement savings.”

In 2020, the US Census Bureau found that from 2010 to 2020, the median income for seniors only increased about $300 in real terms, from $46,360 to $46,686. Additionally, while the rate of seniors living in poverty has fallen since 2010, the number has actually increased. As the Baby Boomer generation begins to surpass sixty-five years of age, their large size makes for a more complicated story. Since the US Census began reporting poverty rates by age, the 5.8 million figure recorded in 2021 is the largest on record for seniors since 1959. It is critical to mention that the rates and numbers for Black and Latino seniors living in poverty are disproportionate to their size relative to the rest of the population.

Some organizations, like the Senior Citizens League, can attribute some of these increases to the way in which Social Security benefits have failed to keep up with the cost of living for seniors. A recent report by the senior rights organization found that since the early 2000s, benefits had lost around a percent of their purchasing power.