How Much Should I Invest In 401K to Get the Best Benefits?
How much should I invest in 401K might be one of the most frequently asked questions about investment these days. Investing is considered as one of the best ways to plan your future. You can find so many choices of investment these days from gold, stock, or even properties. Some people even use their retirement saving as their investment. One of the most important tools in improving your retirement savings is a 401K.
However, some people might still don’t know about how much money they should invest in their 401K. Basically, there is no limit of cash that you should put in your 401K. However, there are still several important aspects that you should know before you decide to use your 401K to boost your retirement saving as the part of your investment.
Basic Rules in Retirement Savings
Before you decide to use your retirement saving as investment and before you use your 401K as a tool to boost your retirement saving, the first thing that you should know is the basic rules of retirement savings. Just like other types of saving, there are basic rules that you need to follow when you want to use your retirement saving as investment. Basically, there are two basic rules in retirement savings that you should know.
The first rule of retirement saving is that if your employers match the 401K funds, you should contribute enough in order to get the total match. You should do this even though you’re in debt. This is considered as free cash and you’ve better take it. The next rule is that if you can make a payment to Roth IRA, you need to contribute $5,500 a year before you make other payment to your 401K. By doing this, you will be able to have tax-free money in good amount for your retirement.
Choose the Right Ratio
The next thing that you should know when talking about how much should I invest in 401K question is choosing the right ratio for your retirement savings. Basically, there are various choices of ratio that are recommended so that you can divide your income perfectly. The simplest ratio is that you need to spend 50% of your income and save the other 50%. However, this ratio is not as simple as it seems. Some people even have some difficulties when they want to divide their income by using this ratio.
Other alternative is 75-2-5 ratio. In this ratio, you will use 75% of your income, save the other 20%, and give 5% of your income. However, the most important thing is that you should choose the ratio that you are comfortable with. Some people might use 90-10 ratio where they spend the 90% of their income and save the other 10%. Some others might even use 95-5 ratio where they spend 95% of their income and save the other 5%. There is no right ratio in dividing your income. You should pay attention to your needs and personal preferences.
Levels of Retirement Savings
Other important aspect that you should know about your retirement savings is the levels of retirement savings. Basically, there are four levels in retirement savings. The first level is maxing out the employer match in 401K. The second level is maxing out the emergency savings. Level three is maxing out the Roth IRA.
The last level is maxing out your 401K. It will never hurt you if you save more for your retirement savings. Twenty percent of your income is considered as great goal for your retirement savings. However, some experts might recommend saving 25 percents or even 30 percent. The reason to this is because past returns can be used as guarantee for future performance. Those are several things that you should know about how much should I invest in 401K.