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Having a 401(k) plan and regularly contributing to it is a good way to prepare for retirement. If you do have access to this type of plan, it is important that you are investing the right amount of money into it.
Without knowing the proper amount of your income to invest, you could either be overinvesting (leaving you with too little income right now) or underinvesting (leaving you with too little income for retirement). Arrowroot Family Office has advisors who can guide you through your 401(k) plan and help you figure out the proper amount to invest.
A 401(k) plan is considered a defined-contribution account because it is tax-deferred and participants typically contribute a defined percentage of their income to it each month. According to a Fidelity Investment study in 2020, people with 401(k) plans invest an average of about $7,000 a year. Many of these people also had matching contributions to their retirement accounts from their employers. These contributions added together created an average total savings rate of 13.5% of the person’s income.
This savings rate is a decent amount, but the ideal contribution rate should be closer to 15%. This being said, a 13.5% is a good place to start and will leave you with a significant retirement after 30 years. For those who begin their 401(k) plans later on in life, it is better to invest at a higher rate each year to catch up for the lost time.
If the averages have you concerned that you are contributing too little to your retirement, do not fear! It is important to recognize that out of the people who are offered a defined-contribution plan, only 73.3% of employees choose to take it. So, if you are investing anything at all, you are already better off than many people.
You also need to recognize your retirement goals before deciding if you are investing too much or too little into your 401(k) plan. Once you have identified your goals, it would be beneficial to meet with a retirement planner to see if you are doing what it takes to reach them. An advisor can help you adjust where necessary to make sure that you are prepared.
Arrowroot Family Office provides retirement and financial planning services to help you organize these accounts. We understand it can be challenging to navigate them and we want to do everything in our power to help you enjoy the best years of your life!
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