How Much Should You Contribute to a 401(k) in Your 20s

Article Summary:

Companies often provide benefits to their employees, including 401(k) retirement plans. To encourage their employees to save for retirement, these companies will usually match contributions up to a certain amount. If your company offers a 401(k), how much you should contribute to it in your 20s depends on the annual limit on matching contributions and your ultimate retirement savings goal.

While retirement may still seem a long way off, retirement planning is important. And no one turns down free money, right? If your employer offers a 401(k) plan, you can start saving for retirement early on and have your company match those contributions to maximize your savings. Best of all, the money you add to your plan is tax-free, and the compounding interest your retirement savings account generates are tax-deferred.

If you’re in your 20s, you probably have plenty more reasons to spend your money than save it right now. But saving for retirement is a step closer to financial independence, and that’s a goal well worth working toward as soon as possible. To help you reach that personal finance goal, let’s take a look at how 401(k) retirement plans work and how much you should contribute to yours.

Why you need to save for retirement

Once upon a time, employees worked for the same company for their entire careers. When they retired, the company then provided them with a defined benefit pension plan for the rest of their lives.

In 1960, pension plans covered 23 million people or about half of the private sector workforce. Sixty years later, only about 4% of the working population is covered by a defined benefit pension plan. In short, you’re probably on your own when it comes to retirement savings.

Today, you are responsible for your own retirement fund. That means you need to spend your working years contributing to a retirement savings account, such as a 401(k) or an individual retirement account (IRA).

How to save for retirement

Everyone wants to retire comfortably, but how can you build up your retirement fund? The two best options available to you are an individual retirement account (IRA) and a defined contribution plan provided by your employer. If you work in the private sector, this is a 401(k); if you are employed in the public sector, this is a 403(b).

Individual retirement account (IRA)

An IRA is an account you set up for yourself, that is, outside of work. It is funded with pre-tax income — or more accurately, the amount you contribute is a deduction from your earnings, reducing your taxable income. This retirement account does not come with an employer match. As of 2022, the limit on IRA contributions is $6,000 per year, with a higher limit of $7,000 if you are age 50 or older.

There are two types of IRA: the traditional IRA and the Roth IRA, each with its own tax advantages. You can set up an IRA at a financial institution either in person or online. Depending on where you open your account, you can get access to a wide range of investment options, including individual stocks.

401(k) plan

A 401(k) plan is set up by your employer and constitutes a benefit of your employment, like vacation time and tuition assistance. As of 2022, the contribution limit on a 401(k) plan by employees is $20,500 a year, but the major benefit of this retirement plan is that your employer matches your contributions.

It’s worth noting that the money in a 401(k) doesn’t technically belong to you when it’s contributed, only when you ultimately retire and can withdraw those savings. Also, your investment options are limited to those provided by the plan provider chosen by your company.

On the plus side, any compound interest that money earns over time is tax-deferred. You’ll get a tax break whenever money is added to the account, and you won’t pay taxes on it until the money is withdrawn.

Pro Tip

If your employer matches your contributions to a 401(k) plan, you should prioritize contributing retirement savings to that account.

How a 401(k) works

The easiest dollars to save are the ones you never see. Your 401(k) plan contribution comes out of your paycheck, along with your Social Security and income taxes. This is listed in a report at the end of the year, so you can file your retirement plan contribution as a deduction from your taxable income.

The major benefit of saving in a 401(k) plan is your employer’s matching contribution, which is essentially free money. While not all employers offer this benefit, it is highly likely yours does: about 98% of employers fully or partially match their employees’ 401(k) contributions. In most cases, the limit to how much an employer will match is 6% of an employee’s earnings.

401(k) contribution limits

Imagine you’re earning $150,000 a year and your company fully matches your 401(k) contributions up to 6%. If you direct 6% of your annual pay, or $9,000, to your 401(k), your employer will match that contribution dollar for dollar. However, if you put 10% of your pay, or $15,000, toward your 401(k), your employer will only partially match that contribution, capping it off at $9,000.

Now imagine that your company only offers partial matches to 401(k) contributions — for example, 50 cents for every dollar you contribute, up to a limit of 6% of your total earnings. In this case, you would have to contribute $18,000 to your 401(k) to get your employer’s maximum matching contribution of $9,000.

Instead of a percentage, some employers will set a dollar limit on their matching contributions. For example, imagine you’re earning $250,000 a year, but your employer will only match your 401(k) contributions up to $6,000. Even if you can easily afford the maximum employee contribution of $20,500, you won’t see much of a benefit from the company match. For this reason, it’s best to read the fine print before you sign an employee contract.

Vesting period

Are you familiar with the term “golden handcuffs”? This is when it costs you money to walk away from a company and take another job elsewhere.

A 401(k) plan will sometimes come with strings attached: money from the employer’s contributions won’t become yours until a vesting period has passed, usually between one and six years. If you quit your job before then, you lose those contributions.

Employers will use vesting periods as a way to boost employee retention. Fortunately, this will be spelled out in your contract, so as long as you do your due diligence, you shouldn’t run into any surprises here.

Pro Tip

If you can afford it, it’s a good idea to contribute enough money to your 401(k) to gain the maximum matching contribution from your employer.

Who wants to be a millionaire?

The good news if you’re young is that time is on your side. If you were to put $6,000 into your retirement account every year and consistently earn a 7% annual return, you would cross the $1,000,000 threshold in under 38 years. This means if you start saving at age 22, you could become a millionaire by the time you turn 60.

While a million dollars is an impressive goal, that amount of money doesn’t go as far as it used to. An acceptable drawdown rate for retirement assets is 4%, so a million dollars would only give you an annual income of $40,000 (plus whatever you would receive from Social Security).

Pro Tip

Historically, the stock market has provided an excellent return over long periods of time. Since saving for retirement is a long-term goal, you are likely to see higher returns when you finally withdraw your savings.

How much you should save for retirement

If you ask how much money you should save for retirement, most people will tell you to “save as much as you can.” Of course, that answer isn’t helpful if you’re looking for a specific number.

To figure out how much you should be saving for retirement, follow these two guidelines:

  • Aim for 10%. Strive to save 10% of your annual income before taxes. Of course, if you can afford to save 20% or 30%, do so.
  • Maximize your company’s matching contributions. If your company matches 401(k) contributions, don’t leave money on the table. Contribute enough of your income to your 401(k) to get the maximum matching contribution from your employer.

Why it’s important to save early

Retirement may seem a long way off when you are in your 20s. Maybe you don’t believe your parents when they tell you time flies, yet think about your college experience. In your freshman year, graduation day was still so far away, but in your senior year, you looked back and wondered where all that time went!

Life will be much like your college years. Someday, you may look back and wonder where the years — and all your money — went. Don’t let time get away from you! The earlier you start saving, the more you’ll have to fall back on when you finally retire.

Retirement savings vs. Social Security

Many people think Social Security is the same as a retirement plan, but that’s not true. Social Security is actually one part of a larger retirement plan. A good financial advisor will explain that retirement income is like a three-legged stool: one leg is Social Security, one leg is income from your retirement assets, and one leg is income from outside assets or part-time employment.

In the 1990s, several politicians quoted a survey in which respondents believed they were more likely to see a UFO than collect Social Security, implying they did not see Social Security as a guarantee. Although this is unlikely, it is important to realize your financial future is mostly in your hands. You shouldn’t assume someone else will support you when you stop working.

How retirement savings can help you now

If you still feel like retirement is too far off to worry about now, consider reframing it as “financial independence” instead. Wouldn’t it be great to reach a point where work is a choice instead of an obligation? Your savings can help you reach that goal!

Another way to look at your retirement savings is as an emergency fund. During the COVID-19 pandemic of the early 2020s, businesses closed and many people lost their jobs. Suddenly, everyone found themselves needing to dip into emergency savings to pay their rent and cover their bills. However, according to a survey conducted by Bankrate in January 2022, 56% of Americans wouldn’t be able to cover a $1,000 emergency expense from their savings alone.

Although retirement accounts are meant for retirement and incur significant penalties for early withdrawal, it is possible to take out a loan against a retirement savings account in case of an emergency.

Practical ways to save for retirement

The easiest way to save for retirement is to allocate money from your paycheck directly to your 401(k). If you earn raises throughout your career but your expenses largely stay the same, you can put some of that extra money toward your savings and pay down your debt (such as student loan debt) as well.

Similarly, if you earn bonuses from your job, it may be a good idea to put all or part of that money into your retirement savings. Lastly, if you have no immediate need for it, you can deposit your annual tax refund into your savings account.


How much do most 25-year-olds have in their 401(k)?

According to Fidelity, the average 401(k) savings of people between the ages of 20 and 29 is $15,000.

Should I have a 401(k) in my 20s?

Ideally, you should start putting money into some sort of retirement savings account as early as possible. If you don’t have a 401(k) through traditional employment with a private company, you can open an individual retirement account (IRA) on your own.

What percentage of my income should I put in my 401(k) at age 25?

A good retirement savings goal to aim for is the equivalent of your annual salary by age 30. If you start saving early in your 20s, you should be able to achieve this goal by setting aside about 15% of your salary every year.

How much does the average 20-year-old have in their 401(k)?

According to Vanguard, people under age 25 have an average of $6,264 in their 401(k).

How much should I have in my 401(k) at age 27?

That depends on when you started your career and the salary you are currently earning. If you start saving early, then at age 27, you should be on track to save the equivalent of your annual salary by age 30.

What percentage of my paycheck should I contribute to my 401(k)?

You should contribute at least enough money from your paycheck to get the full matching contribution offered by your company. Most people between their 20s and 40s save 7–8%, but if you can afford it, aim to save at least 15% of your salary each year.

Key Takeaways

  • The best way to build a retirement fund is with a retirement savings account. This can be a 401(k) plan provided by your employer or an IRA you set up yourself.
  • Many employers will match their employees’ 401(k) contributions up to a certain amount.
  • As much as possible, you should contribute enough of your income to your 401(k) to gain the maximum matching contribution from your employer every year.
  • If you start saving for retirement in your 20s, you should aim to have the equivalent of your annual salary in your retirement account by age 30.
  • Social Security is not the same as a retirement plan. You are responsible for most of your retirement planning, so it’s a good idea to seek out financial planning and investment advisory services to help you manage your retirement savings and income.

Your 401(k) plan is a useful tool, and like any tool, it’s a good idea to have a qualified professional teach you how to use it. A financial advisor, such as a certified financial planner or a registered investment advisor, can help you stay on track to retire comfortably and make the most of your retirement savings with investment advice. Check out SuperMoney’s guide to saving for retirement, and use our comparison tools to find the best wealth management professionals and investment advisory services for you!

View Article Sources
  1. Evolution of employer-provided defined benefit pensions – U.S. Bureau of Labor Statistics
  2. Just how common are defined benefit plans? – CNN Money
  3. Retirement Topics: IRA Contribution Limits –
  4. Retirement Topics: 401(k) and Profit-Sharing Plan Contribution Limits –
  5. 56% of Americans can’t cover a $1,000 emergency expense with savings – CNBC
  6. Here’s how much money Americans in their 20s have in their 401(k) accounts – CNBC