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When starting a new job with an employer who sponsors 401 (k) plans, you usually have the option to contribute a portion of your monthly income either in the form of a lump sum or a fixed percentage. But which is the better option? View the difference in your long-term savings balance for both lump-sum and percentage contributions.

In any case, benefit from employee matching

Whether you choose a lump sum or a percentage contribution, try to maximize each one Employer matching on your contributions to 401 (k), 403 (b), or 457 (b) plans. Not every company does this, but some offer a dollar-for-dollar match up to a certain amount (e.g., $ 5,000 per year) while others offer a percentage, such as a percentage or amount.

In any case, employer matching is the best way to save for retirement in the long term. For you, your employer (possibly) doubles your pension contributions for a growing investment exponentially over time, thanks to compound interest. It’s a tax write-off to the company, so you both win the deal.

For this reason, financial advisors recommend that you contribute at least enough to take advantage of all of your employer’s matching. Otherwise they recommend a contribution 15-20% of your total gross income (in an ideal world, of course).

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This is how flat dollar contributions work

A flat fee works well when you have a tight budget with very little room for surprises. You know exactly how much you are paying each month (or even years) and can plan accordingly. You can also ensure your contributions are fully met by dividing the annual contribution limit of $ 19,500 by the number of paychecks you receive.

The disadvantage? Well, your income could easily change if you get a raise or if you take on a new role. Likewise, the maximum contribution limit is not fixed, and the IRS could easily increase the limit in any given year. Overall, the danger here is a “set it and forget it” mentality where you forget to update your posts to reflect a raise. The temptation would then be to decrease your willingness to contribute once you start making more money.

This is how percentage contributions work

In general, a percentage long-term saving option is better because you never have to worry about losing ground on your contributions. There’s a little bit of psychology involved here too – if you automatically contribute, say, 10% no matter what, you won’t be tempted to cut it back every time you get a raise, which often happens every year or so, for some employees. And for all income increases, if you keep that fixed percentage constant, you are more likely to beat the flat dollar contributions to your 401 (k).