Step 1 : Assign a Contribution Rate

Setting your Contribution Rate

What does that mean?

Your contribution rate is the percentage, or dollar amount, that you elect to withhold from your paycheck each period to invest in your 401(k) retirement account.

Determining Your Contribution Rate:

Each individual's retirement account should reflect their specific needs and goals. This includes the optimal amount to contribute each pay period. While contributing the maximum amount would be ideal, it is not always feasible. Each individual must find the right balance between their current cash flow needs and funding a retirement that meets their future cash flow needs.

Three Steps to Healthy Saving Habits

1

Start early

When it comes to investing for retirement, the sooner you start saving the better. A big mistake younger investors make is that they will always be able to catch up later when they are making more money. Due to the “time-value-of-money” phenomenon, this can prove to be a costly mistake. Saving early, even if the amount appears insignificant, can materially benefit your long-term account value.
2

Save Regularly

The 401(k) deducts from your payroll automatically, so the best thing to do is remain disciplined and continue to stay the course throughout your life.
3

Gradually Increase Your Contribution Rate

Set goals to increase your savings rate each time you achieve a personal milestone. Whether it’s based on age, income, or personal milestones (getting married, having children), gradually increasing your contribution rate over time will help to augment the compound growth characteristics inherent to 401(k) investing.

Frequently Asked Questions

What is the maximum I can contribute to my 401(k)?

In 2022, the annual limit is $20,500 for individuals under age 50 (not to exceed 92% of your annual income). For individuals ages 50 and over, a “catch-up” provision enables you to save $6,500 per year, resulting in a maximum contribution of $27,000.

What is the minimum amount I am required to contribute to my 401(k)?

401(k) investing is optional, based entirely on your own discretion. As such, there is no minimum amount you are required to contribute.

When can I adjust my contribution rate?

You can adjust your contributions anytime via your online account. Changes to your contribution rate are updated in real-time, and take effect the following pay period.

Ex. Adam gets paid the 1st and 15th of each month and is currently contributing 5% to his 401(k) plan. On January 10th, Adam decides to increase his contribution rate to 6%. This change will be reflected in the system the following day, and 6% will be withdrawn from his account beginning on the 15th.

Can I contribute to my 401(k) one time a year?

Yes… Since contribution rates can be adjusted at any time, an individual could choose to set the maximum contribution rate (92%) at any point throughout the year. This will result in a lump sum contribution in a specific pay period. Once this contribution has been processed, the investor can then change their contribution rate to zero percent for the remainder of the year.

That being said, it is preferable for contributions to occur on a regular basis (each pay period) so as to benefit from a practice called “dollar-cost averaging.” As market prices move up and down over the course of your investment timeline, periodic contributions will typically result in less volatile returns, over the long-run, than lump-sum annual contributions.