6 Strategies for Funding Your 401(k)

Employees use a variety of tactics to determine the amount of their 401(k) contributions.

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The tax break that workers get for saving for retirement in a 401(k) is a valuable reason to participate. But that’s not the primary reason most investors direct a portion of their paycheck into a retirement account. Getting a 401(k) match is the factor that motives the most retirement savers to utilize these tax-deferred accounts, according to a new ING Retirement Research Institute survey. Here’s a look at how workers choose how much to deposit in their 401(k) each year.

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Maximize the match. Some 40 percent of retirement savers say that getting an employer contribution is the most important reason they participate in a 401(k) plan, the Mathew Greenwald and Associates online survey of 1,000 workers currently participating in an employer-sponsored retirement plan found. A quarter (26 percent) of the survey respondents contribute the minimum amount necessary to get the full company match. However, 17 percent of the workers surveyed say their employer has recently reduced or eliminated a 401(k) match and another 14 percent were never offered an employer contribution. It’s important to save for retirement even if you work for an employer that doesn’t currently contribute to a retirement plan.

Minimize taxes. A few retirement savers say that reducing their taxable income (14 percent) and earning tax-deferred growth (13 percent) are the primary reasons they use a 401(k) plan to save for retirement. Some 15 percent of those surveyed contribute the maximum amount allowed by law in order to maximize their tax breaks. Workers can defer taxes on up to $16,500 using a 401(k) account in 2011, an amount that jumps to $22,000 for those age 50 and over.

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A calculation. Most retirement savers (65 percent) say they calculate how much to save in a 401(k) themselves. Some workers (14 percent) also consult one or more outside sources including employer educational materials, a financial adviser, friends and family members, and internet research. It’s a good idea to use an online calculator to see if your current savings rate will allow you to maintain your standard of living in retirement.

Guess. Many workers simply guess how much to put in their retirement account. Some employees say they used a gut feeling (21 percent) or chose an amount that feels right (7 percent) to determine their 401(k) contribution.

Automatic saving. Having a portion of your paycheck directly deposited into a 401(k) before you even see it can make it psychologically easier to save. Many retirement savers use a 401(k) primarily because it makes it easy to save each month (19 percent), because they were automatically signed up for the plan (12 percent), and because an employer encourages it (2 percent). However, only a small portion of retirement savers say they contribute an amount automatically set by an employer (4 percent) or recommended by a financial adviser (2 percent).

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Save what is left over after other expenses. Just over a third (35 percent) of retirement savers contribute what they believe they can afford to after other expenses are taken care of. However, many investors say they could afford to contribute more than they do now. A majority of 401(k) participants say they could afford to increase their annual contribution by 1 percent (87 percent). And many retirement savers report that they could afford to save 3 percent more (59 percent) and even boost contributions by 5 percent (32 percent).