Retirement Plan Contributions - How to Feel Confident in Your Deferrals

One of the most difficult questions when it comes to maintaining your defined contribution (DC) retirement plan is how much money should be going in. You’ll see guidelines online that assert that contributing 15%-20% of your paycheck with each deferral is a good goal. That certainly will allow your account balance to accumulate at a great rate, but that is not a small chunk of change, especially if your current contribution rate is far off from that target. There are certainly plenty of employees who are not in a position to reach that number in their current financial situation. This begs the question: What is the right contribution amount for you?

The first important thing to know is that contribution rates are not static. If your contribution rate is too high or too low, you can generally adjust it at any time. This allows you to be a bit more comfortable when it comes to experimenting with numbers, and doesn’t punish you heavily for being too safe or too risky. Safe, however, is the keyword here. It is not easy to access funds within a retirement account before retirement, oftentimes it is even impossible. If you defer too much money and don’t have the savings necessary to cover urgent expenses, things can get tricky fast. Make sure that you have enough accessible savings for your expenses, and money saved away for emergencies. If even doing a very small contribution would put you at financial risk, do not do it. Take care of your own finances, and once you are in a more comfortable position, reassess what you are able to do in your retirement account.

If you do have a comfortable amount of savings, we can begin to look at how much of your paycheck should be contributed each pay period. Should we jump right in and contribute 20%? You can certainly try, but going from no contributions to a fifth of your paycheck is a pretty big jump, and can blindside you if you aren’t adequately prepared. Instead, we can ease our way in by utilizing the employer matching contribution. Many employers will offer a matching contribution for a certain percentage of employee deferrals, up to a limit. This means that if you make contributions to your retirement account, your employer will too. Generally, these employer contributions are maximized somewhere between 3%-6% of your paycheck. For example, a very common match is ‘100% on your first 3%, 50% up to 5%.’ What this means is a 3% contribution from your own paycheck will also net you a 3% contribution from your employer, and a 5% contribution will get you 4%. With this formula, deferring just 5% of your salary will net you 9% in total contributions. With this information on our side, a good starting point for contributing is simply maximizing the employer match.

Once we are contributing enough to receive the full match, we can take our time and assess where exactly we are. Is this causing us to diminish our savings? If so, it may be time to start working on a budget, or lowering/stopping contributions in order to stay financially stable. Are we feeling comfortable with the current amount we are contributing? Maybe we can try ticking our contribution rate up a percentage point or two and reassess in a month or so, maybe we should stop there, or maybe we can keep increasing. There is no catch all answer to how much each person should be contributing to their retirement account. Every person has a unique situation that will impact how much they are able to save. Once we are able to assess our baseline situation, we are able to ease our way up to a contribution rate we are comfortable with.

As a retirement plan provider, our sole goal is to help you save for a retirement you can be proud of, without sacrificing your current wellbeing. We have no interest in coercing you into a contribution rate that you are not comfortable with. We are here to help you every step of the way towards retirement, and are happy to provide the insight necessary to make choices you can feel confident in.