”Hi Money Minder,
I’m really sorry to bother you with this, but I’m feeling completely lost when it comes to understanding how a 401k works. I’ve tried watching videos and reading up on it, but nothing seems to make sense to me. Math was never my strong suit, so I’m hoping you can help me out in a simple and clear way.
I recently moved to the US and landed a decent job in Washington State that pays me $94,000 (well, potentially $98,000 with bonuses, but let’s stick to $94k for now).
My employer has put me on a traditional 401k plan with a 50% match up to 6% of my eligible pay, unless I choose to opt out.
So, here are my main concerns:
1 – I’m 33 (turning 34 in January), and I’m wondering how much I should contribute to my 401k to have a comfortable retirement around age 65. I don’t have kids, don’t have pets, and I’m pretty good with money management. What’s the average retirement savings for someone earning around $100-125k? Just a rough estimate would really help me visualize things better.
2 – I’ve heard conflicting advice about whether to go with a Roth 401k or a traditional one. I just want to have enough to live comfortably in my old age without stressing about money. Given my current situation (33yo, just started working in the US, starting contributions in September), would you recommend Roth or traditional? And how much should I contribute? Lastly, what does it mean when my employer matches 50% of my “elective deferrals” not exceeding 6% of my eligible pay, if my gross bi-weekly salary is $3,600 (netting $3,000 after health insurance and dental deductions)? Some clear numbers and percentages would be a lifesaver.
I’m really worried about not having a safety net in my old age, starting this whole retirement saving thing so late at 33… Oh, and just to clarify, definitely not a tech person here, in case you were wondering!
Thanks so much for any help you can give me. Really appreciate it! Take care.
Response from THE MONEY MINDER:
Hello There,
Hello, wonderful person seeking advice on 401k!
First and foremost, welcome to the US and congratulations on your new job in Washington State! It’s completely understandable to feel overwhelmed by the complexities of 401k, especially coming from a country with a different pension system. No need to apologize for seeking clarity on this topic. We’re here to help you navigate through it.
To address your worries and doubts, let’s break it down step by step. Given that you’re 33 and aiming for a comfortable retirement around 65, it’s recommended to contribute around 15% of your income to your 401k. Since your company offers a 50% match up to 6% of your eligible pay, a smart move would be to contribute at least 6% of your gross salary into the traditional 401k to maximize this employer match. This way, you’re not leaving free money on the table and kickstarting your retirement savings journey.
In terms of Roth versus traditional 401k, the decision depends on your tax situation now versus in retirement. Since your goal is to have a livable wage in your golden years, a traditional 401k might be more beneficial as it allows for tax-deferred growth until retirement when you’re likely to be in a lower tax bracket. As for the percentage to contribute, start with the 6% to capture the full employer match, and then gradually increase it over time as you feel more comfortable.
It’s never too late to start saving for retirement at 33, and you’re making a wise decision by taking this step now. You have plenty of earning years ahead to build a safety net for your future self. Remember, consistency and discipline in saving regularly will make a significant impact over time. Keep educating yourself about personal finance and retirement planning, and you’ll be on the right track towards financial security.
All the best from THE MONEY MINDER as you embark on this journey to secure a comfortable retirement for yourself. Remember, slow and steady wins the race when it comes to building wealth for the future. Keep going, and you’ll thank yourself later on!
