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About 15% of investors maxed out employee deferrals in 2022, according to a 2023 report from Vanguard. However, the average deferral rate was 7.3% for employees automatically enrolled in their plan.
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Pre-tax 401(k) contributions provide an upfront tax break by lowering adjusted gross income, but investors owe fees on future withdrawals. In comparison, after-tax Roth 401(k) contributions allow assets to grow tax-free, without reducing current year taxes.
“If we’re completely comfortable waiting until age 59 1/2 to touch that money, those tax benefits can go a really long way,” said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York. He is also a member of CNBC’s Board of Financial Advisors.
If we’re completely comfortable waiting until we’re over age 59½ to touch that money, those tax benefits could go a really long way.
Douglas Boneparth
Chairman of Bone Fide Wealth
However, “affordability is obviously a big part of it,” he said, and other financial goals may come before maximizing your retirement contributions in a given year.
If you have limited cash flow, experts suggest contributing at least up to your employer’s counterpart, which is a company deposit based on your contributions. “But then the prioritization of goals starts,” Boneparth said.
If you’re saving to buy a house or pay for a wedding, “you may see more money allocated to a money market fund or savings account than to a 401(k)” for a while, he said.
Your emergency savings are also important, said Kathryn Valega, founder of Boston-based Green Bee Advisory, and she recommends starting with at least three months of expenses.
Ultimately, you need to arrange your short- and long-term goals, including how much those goals will cost and when you want to achieve them, Boneparth added.
“Our goal is to max out everyone’s 401(k),” Valleja said. “But there are a lot of customers who can’t.”
When determining the right ratio, “sometimes it’s a matter of trial and error,” she said, and you can experiment with a higher contribution for a few paychecks to see how you feel about your cash flow.
“If you feel like you have more wiggle room, you can increase it by one percent,” Valleja said.
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