KnowHow Archive

Plan Sponsor Guide Participant Guide

Room To Grow?

How do you decide how much to set aside for retirement? You might sit down, figure out your budget, and set aside whatever is left over. Or, maybe you let your employer set the pace by contributing only to the level of your company match. For example, if your employer matches the contributions you make up to 6% of your pay, do you ­contribute only 6%? Do you know how much you can contribute?

Illustration by James Yang

How Much Can You Afford (Not) To Save?

A number of industry surveys show that most people contribute to the level of the employer match—and no more,  but your employer sets that match based on financial considerations that have little or nothing to do with your personal savings or retirement needs.  So, while you want to make sure that you take full advantage of that matching contribution—by contributing to that amount—there’s no reason to stop there.

For example, if you’re only setting aside 6% in your retirement savings account, odds are you could be saving more. In 2010, most workers can save as much as $16,500 on a pre-tax basis in their 401(k) accounts, and that doesn’t include the company match (if you’re older than age 50, you can save even more).  So, even if your company only matches your contribution up to a certain percentage, you may have room to grow.

Calculating Your Savings Max


*Certain plan restrictions may apply to highly compensated workers. See your plan administrator for details.

Let’s assume you earn $50,000 a year, and that you currently save 6% of your pay, $3,000 per year. Based on the above table, you could save as much as an additional $13,500—if you could afford to. However, what if you decided to double your current rate of savings, setting aside an additional $3,000 per year (less than $60/week)?

Over 20 years, that $3,000 could more than double, becoming nearly $6,600 in your retirement account, assuming a 4% rate of return.  Contribute that extra $3,000 every year for 20 years, and you could end up with nearly an additional $100,000 for retirement.  On the other hand, if you saved that same $3,000 in a savings account outside your retirement plan, even assuming the same 4% rate of return, in 20 years, tax payments would have cut that to only about $85,000 (assuming a 28% federal tax rate and a 5% state tax rate).

Why Go Beyond the Match?

Even if your employer only matches your contributions up to a certain point, there are still good reasons to save in your retirement plan, even on an unmatched basis.  You defer paying federal, and perhaps state, income taxes on the amount you save, and on the earnings on your savings—savings that add up to even more for your retirement.

You can do additional savings calculations online at




Nevin E. Adams