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How much is enough to save in a 401(k)?

Analyze your spending habits now to plan for tomorrow

Busy working or busy saving? Maybe it’s time to do both. A great many workers have a saving mechanism in their 401(k), but they commonly don’t know how much is enough to contribute to it.

“It’s a number that is different to everyone,” said Lou Ingargiola, owner, Ingargiola Wealth Management Group, Dunmore. “The question is ‘how much do you spend’ and then you have to get a multiple of the risk for the rate of return. Right now, the rate of return is only around 3 percent,” he said.

Everybody’s number is different because of the multitude of personal considerations. “What are your investments,” he said. “What are your rental incomes that have cash flow? Do you have dividend bank stocks that pay good dividends? It’s all about cash flow, not so much about a specific number.”

He said one formula factors what you typically spend — say about $3,000 per month — then multiplies that number by 12, making it $36,000. “Do you want that for 20 or 30 years?” he said. “At 20 years, that’s more than $1 million.”

Ingargiola said the percentage you’re getting on your return would also make a difference. The better the rate, the more you’ll have in the long run.

He said if you’re doing the math and things aren’t adding up, it’s never too late to change spending habits to increase your contribution.

“You can’t just go to your boss tomorrow and ask for a raise,” he said. “You have to really look at what you’re spending. Most people know what their salary is and while you can’t control what comes in, you can always control what goes out.”

He said to carefully analyze the expenditure side first, then increase your contributions.

Ingargiola said diversity is key when saving for retirement. “Definitely diversify,” he said. “You definitely want to be in things that don’t correlate with or depend upon each other.” In this way, if things crash, you won’t lose everything. “You want to have money in different segments and get cash flow from different places, whether that be bank stocks or real estate.”

He said the rules really haven’t changed to make it easier to invest. “In all of the 401(k)s with which we consult, we’re trying to put in the opt-out feature instead of the opt-in,” he said. “So once you reach eligibility, unless you opt out , you’re going to put 3 or 4 percent of your pay in and every year, it’s going to increase automatically until you hit 10 percent of your salary.” (For more on the differences between opt-in and opt-out models, see page 14.)

Ingargiola said because many employers offer a 401(k) match, it makes this savings vehicle even more attractive. “You’re walking by free money as I always say,” he said of people who fail to maximize their 401(k)s.

Many people justify ignoring their 401(k)s by saying they plan to make added income during their retirement with part-time jobs or side investments. However, Ingargiola believes this is unnecessary for those who exercise some discipline. “Put as much money in your 401(k) as you can,” he said. “If you don’t see it, you won’t spend it.”

He said people under 50 can invest as much as $17,500 and an additional $5,500 if you’re over 50.