How much should you contribute to a 401(k)?

Saving for retirement can feel like a major undertaking, but it can come with many rewards. Being able to afford taking care of yourself when you retire can give you flexibility. It also can make it easier to reach your financial goals, such as paying for a dream vacation or donating to a favorite charity.

Creating a source of income through 401(k) savings can help you focus on what's most important to you when you leave the workforce. Let's explore how much you may want to save to enjoy a happy and comfortable retirement.

A general rule of thumb is to contribute 10% to 15% of your paycheck toward your retirement savings. But you don't have to put it all into a 401(k). Saving that much may not feel doable to you at this point—and that's okay. Find an amount that works for you today, then try to raise it up a percentage point each year until you hit the 15% mark or max out the contribution limit of your 401(k).

If your employer offers a matching contribution up to a certain limit, be sure to match it—at a minimum—so you don't leave free money on the table. For example: Say your goal is to save 10% of your salary for retirement, but you can't afford to save that much. If your employer offers to match your contributions up to 5%, and you contribute 5% of your salary to your 401(k), then you're effectively putting away 10% of your salary.

If you don't contribute the maximum amount your employer is willing to match, you're essentially walking away from free money. Your overall compensation includes not just your salary, but your benefits, too. So if you don't take advantage of an employer match, you're basically underpaying yourself.

Keep in mind that if you have a high salary, putting 10% or more of your salary into a 401(k) may not be feasible. The annual salary deferral contribution limit for 401(k) plans is $22,500 in 2023 and $23,000 in 2024. If you reach that maximum but still want to put away more money for retirement, you can contribute to another retirement savings account, such as an individual retirement account (IRA).

Catch-up contributions make it possible to contribute more than the annual contribution limit associated with your retirement plan, if it allows. You also must be at least 50 years old or will be before the end of the year. If this applies to you, you can contribute an additional $7,500 to the annual contribution limit.

Depending on what stage of life you're in, how much you want to save for retirement can vary. For example, someone in their early 20s may be on a tighter budget and have decades to make progress on their savings goals. They wouldn't need to have as much saved yet as someone who is in their 50s and may be thinking about retiring in the next decade.

Saving for retirement can feel overwhelming, so it can be helpful to set smaller savings goals you intend to reach each decade. Here are some examples:

• In your 30s:Have at least one year's salary in a retirement account.
• In your 40s: Have three times your annual salary in a retirement account.
• In your 50s:Have five to six times your annual salary in a retirement account.
• In your 60s:Have seven to eight times your annual salary in a retirement account.

Once you know what your savings goals are, you can choose a percentage of your salary to contribute to your 401(k) each year to help reach those goals. First, look at how much money you already have saved. Then, figure out how much more money you would need to save each year to meet your next goal. Based on that, you can determine how much money from each paycheck you need to put toward your retirement contributions.

Compound interest can help you make the most of your hard-earned savings. When you invest in a retirement account, you not only earn interest on the money you save, but you also earn interest on the interest that's been added to your account. This process of compounding can make it much easier to reach your savings goals over time, even if you only can set aside small amounts right now.

The following infographic illustrates how saving early allows compound interest to make a greater impact on growth. Take a look at Investor A and Investor B. Even though Investor A only contributed $60,000 more to their retirement savings than Investor B, they experienced more than $595,000 in growth.

Once you've contributed enough to your 401(k) to maximize your employer's match, it may be a good stopping point for you on those contributions, so you can diversify your retirement savings. The closer you get to retirement age, the more you can benefit from having a diversified mix of assets to fund your retirement. Having diversified savings vehicles and investments can help ensure you don't have a huge tax burden in retirement.

IRAs are another way to save and diversify your investments. IRAs typically have more flexible investment options than employer-sponsored 401(k) plans. And if you've exhausted those options and still have room to stash away more money, then you can come back to your 401(k) and make additional contributions as long as you haven't exceeded the annual contribution limit. However, if you are contributing to an employer-sponsored plan, IRA contributions may not be able to be made on a pre-tax basis.

Your retirement savings strategy isn't set in stone and is likely to change over time as your income, lifestyle and financial goals evolve. If you're not sure where you stand when it comes to saving for your golden years, you can use a retirement income calculator to check your progress.

Saving enough money to support yourself and others during retirement can be challenging, but you don't have to go it alone. Consider connecting with a local financial advisor for your retirement needs. From navigating the rules and regulations around making annual contributions to your retirement accounts to determining how much to contribute, a financial advisor can help you put together a strategy you feel good about.