Women prepared for retirement by maximizing contributions to their retirement accounts.

Maximizing your 401(k) and IRA retirement contributions

When you contribute to a 401(k), 403(b), or IRA, you’re already on a path to help secure your financial future. But could you save more? Making the most of your organization’s retirement plan now could help ensure your golden years are even more golden.

Read “5 steps to creating your retirement plan” to help you get started.

‘How much should I save for retirement?’

We get that question a lot. So we asked Stanley Poorman, advice and planning manager for Principal®, who said there’s no one-size-fits-all answer.

“A good rule of thumb is to save 10–15% of your income toward retirement, but that also depends on when you get started. That may be fine if you’re 25, but if you’re starting at 50, you may need to save more to retire comfortably,” Poorman says.

One way to get a quick snapshot of how much you may need to save is to use the Retirement Wellness Planner. By entering a few numbers, you’ll get a sense of whether you’re on track or not.

Another factor is whether you have a matching contribution from your employer, and if so, what percentage the company contributes. Poorman suggests deferring enough of your pay to get that match. (Hey, it’s free money.)

Could you increase your 401(k) contribution?

A 1% increase only makes a small difference in your paycheck—but may make a big difference down the road.

Cutting or reducing non-essentials could allow you to bump up the money you’re putting into your 401(k) or 403(b). Like the gym membership you haven’t used in 6 months, for example. Or buying a certified used car instead of a new one. How about those merit increases or a bonus?

A little could go a long way in the future. Consider this example1 for a $35,000 annual income:

Additional contributionReduction in bi-weekly take-home payEstimated additional monthly retirement incomeTotal employee contributions over 30 years

Imagine if you could increase it to 10% of your pay?

If you’re wondering how to save more toward retirement, read 5 smart money tips from super savers.

Graphic of a thumbtack. Tip: Don’t forget inflation’s impact on retirement savings. You may feel like you’re saving enough to maintain your current lifestyle. Even though your income may increase over the years, so will your cost of living (typically). If you spend $50,000 a year to live in today’s dollars, for example, how much more will it take 30 years from now?

Good news about retirement contribution limits and income ranges

If you're already maxing out your retirement accounts, some news you should know: The Internal Revenue Service (IRS) made a cost of living adjustment that allows you to put away more money in retirement plans.

Anyone enrolled in their employer’s retirement plan and still working can generally make a maximum contribution of $19,500 per year, which remains unchanged from 2020.2

If you have an IRA, your annual max contribution is still $6,000. (Want to learn more? Read the basics of IRAs.)

Get the scoop: Read more about the 2021 contribution limits and income ranges.

Consider making catch-up contributions to your 401(k) or IRA (if you’re old enough)

How about this cool perk once you’ve hit the big 5-0:

You can contribute an additional $6,5003 to your 401(k) or 403(b) plan once you’ve reached the annual maximum, but only if you’re 50 or older and it’s an option in the plan. And since these contributions are typically pre-tax, they’ll lower your current taxable income even more. You can make catch-up contributions to an IRA, too (that limit is $1,000).

Next steps:

This example is for illustrative purposes only. It assumes $35,000 in annual income, 3.5% annual wage growth, 30 years to retirement, 7% annual rate of return and a 25% tax bracket. Estimated monthly retirement income calculations assume a 4.5% annual withdrawal in retirement. The assumed rate of return is hypothetical and does not guarantee any future returns nor represent the return of any particular investment option. Reduced take-home pay is accurate for the initial year and would change based on participant’s annual pay. Estimated savings amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary.

2 Contributions are limited to the lesser of the annual plan or the IRS limit as indexed.

3 Some plans may not allow catch-up contributions to the plan.

This document is intended to be educational in nature and is not intended to be taken as a recommendation.

Investing involves risk, including possible loss of principal.

Asset allocation and diversification does not ensure a profit or protect against a loss. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline.

Investment and insurance products are:

  • Not insured by the Federal Deposit Insurance Corporation (FDIC) or any federal government agency, 
  • Not a deposit, obligation of, or guaranteed by any bank or banking affiliate 
  • May lose value, including possible loss of the principal amount invested.

Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Investment advisory products offered through Principal Advised Services, LLC. Principal Life, Principal Securities, and Principal Advised Services are members of the Principal Financial Group®, Des Moines, Iowa 50392.

Principal, Principal and symbol design, and Principal Financial group are trademarks and service marks of Principal Financial Services, Inc, a member of the Principal Financial Group.