How Much Should I Invest in My Retirement Fund Pre-Tax?

Determining the proper amount of money to save for retirement can be one of the most difficult financial decisions that you ever have to make. Every person has different requirements for how much money he will need to live comfortably during retirement. Looking at your retirement plan maximums and using a retirement planner can help you make a better informed decision.

Percentage of Income

• One of the general rules of thumb that has been used by many financial planners is to save 10 percent of your pre-tax income for retirement. If you start early enough and save 10 percent out of each paycheck, there is a good chance that you will have enough money built up by the time you reach retirement age. Regardless of how much money you make, the power of compound interest can work in your favor to provide you with a large nest egg.

Retirement Planner

• Sitting down with a retirement planner can help you determine exactly how much money you need to save out of each paycheck to reach your retirement goals. Retirement planners will help you figure out how much money you will need during retirement to live comfortably. Then they can use financial calculators to figure out how much out of each paycheck you need to save. They will ask you a number of questions to gain information about your financial situation and then help you make decisions.

Maximum Contributions

• As your income increases, you may consider contributing the maximum amount to your retirement account each year. The Internal Revenue Service sets a maximum contribution limit on each type of retirement account that is available. For example, with a 401k, you can contribute a maximum of $16,500 per year, as of 2010. With an individual retirement account, you could contribute as much as $5,000 per year. If you are over 50, these limits jump up to $22,000 per year and $6,000 per year, respectively.

Matching

• If you have an employer-sponsored retirement account such as a 401k, you may want to consider the impact of matching contributions. Employers often make matching contributions because it provides them with a tax deduction. This is free money that you can use to grow your retirement account. If you cannot afford to max out your retirement account contribution, you may want to at least contribute an amount that will get you the biggest match you can get.

Considerations

• When working with a financial planner, you may want to consider that your spending could actually decrease during retirement. Many assume that their spending will increase during retirement because of inflation. Some financial planners now use the logic that your spending will decrease during retirement in every category except health care. This could allow you to set aside less money or retire earlier than you anticipated.