Build a Contribution Cushion
Deciding what percentage of your pay to contribute to a 401(k) plan can be tricky. The easy answer put away the maximum contribution (currently $17,500) each year to take full advantage of the tax deferred growth. Of course, not everyone is in a position to do that. At the very least, however, you should contribute enough to take advantage of any employer match. That’s like getting an instant return on your money. Beyond that, you should base your contribution on your retirement plan, calculating how much you will need at retirement then determining how much will need to be set aside each month assuming a reasonable rate of return.
If you determined, that you will need to set aside, say, 8% of your earnings to accumulate the capital you need at retirement, you should consider building in a “cushion” for the down years. Down years could be those periods when your returns fall short of expectations, and they can also be those years when, for whatever reason, you are unable to make your 8% contribution. If your plan tells you to put in 8% of your earnings, bump it to 9%. You’ll build a significant cushion that can offset the unexpected. The key to any retirement savings plan is to maintain the discipline of systematic savings with no break in your strategy. You can’t lose.