The 401k maximum employee contribution is $19,500 for 2020, up $500 from $19,000 in 2019, and $18,500 in 2018. Meanwhile, the employer contribution limit also gets a $500 increase to $37,500, bringing the total annual 401k contribution limit to $57,000.
For participants ages 50 and over, the additional “catch-up” contribution limit will be $6,500. It’s interesting the IRS doesn’t want to give older folks an incentive to save more.
Although your 401k alone will unlikely be sufficient to meet all your retirement expenses, if you max out your 401k every year, you will likely far surpass the median (~$18,000) and average (~$200,000) household retirement savings held by those between the ages of 56 – 61 today.
Historical Maximum 401k Contribution Limits (Employee + Employer)
Here’s an updated chart with the historical maximum 401k contribution limits. Notice how much more the employer can contribute to your 401k than the employee.
When you hear about employer profit sharing or employer 401k matching, those numbers can now go up to $37,500 a year. It all depends on how profitable and generous your employer is.
For example, those employers who are offering a 100% match up to $5,000 of employee contributions still have $32,500 they can contribute if they truly wanted to.
From 2001 to 2012, I worked for a pretty generous employer, who, during my final five years contributed over $20,000 a year in profit sharing. Therefore, I was boosting my 401k by over $35,000 a year.
Do not take your employer 401k match and profit sharing for granted. The amounts can really add up over time.
For those of you who are now entrepreneurs, freelancers, or work for money-losing startups, not having a 401k or an attractive company contribution is a real opportunity cost. Make sure you calculate these lost benefits before you leave your cushy day job.
Related: How Much Do You Have To Make As An Entrepreneur Or Freelancer To Replicate Your Day Job Income
For entrepreneurs and freelancers, however, not all is lost when it comes to the 401k because we are allowed to contribute to a Self-Employed 401k (aka Solo 401k) up to the $57,500 maximum if you have enough operating profits.
A self-employed person has the right to contribute up to $19,500 to their 401k as the employee, and roughly 20% of the operating profits (revenues minus expenses). Therefore, to contribute the maximum $57,000, the entrepreneur needs to earn around $200,000 in operating profits (revenue – expenses before taxes).
Here’s a more detailed write-up about how to calculate how much you can contribute to a self-employed 401k plan. Although it’s great an entrepreneur or freelancer can contribute $57,600 in tax-deferred profits to retirement, remember it’s all their money to begin with. Whereas if you are an employee working for a company, it’s free money.
401k Savings Guide By Age
The below is my updated 401k savings guide by age to include various contribution amounts, various contribution limits, company profit sharing amounts, asset allocation levels, and historical stock market and bond market returns. These are all rough estimates to give readers a target to shoot for.
If you are “unfortunate” enough to only work until age 35 at a company with a 401k plan, then you can shoot for a 401k savings range of between $150,000 – $500,000. If you are fortunate enough to work for 38 consecutive years at a company with a 401k plan until you’re allowed to withdraw penalty-free, then your target savings is $1,000,000 – $5,000,000.
As a Middle Age Saver (40 years old), I started my 401k contribution in 2000 when the contribution limit was just $10,500. Therefore, I’m more focused on the Mid End column to get to $2,500,000 by the time I turn 60. Even if I contribute $35,000 a year for the next 20 years to my Self-Employed 401k plan, I’ll need the stock market and bond market to rise by at least 3% a year to get to $2,500,000. In other words, when it comes to investing, there are no guarantees. You must take a certain level of risk.
The “Younger Age Savers Or High End” column is the 401k savings potential for those just out of school and who have generous employers. In every scenario, an individual who contributes for 38 years will become a millionaire. Unfortunately or fortunately, not everybody will work for such a period of time.
Motivation For Maxing Out Your 401k
I really hope everybody who has a job that provides a 401k plan takes full advantage. To not do so is completely foolish. Below is data from the Bureau Of Labor Statistics regarding the latest participation rate in defined contribution plans like the 401k.
A 44% participation rate is not bad, but the number should be 100% if you are a Financial Samurai reader. Further, you can bet that only a minority of the 44% max out what they can contribute to their pre-tax retirement savings plan, otherwise, how else would you explain only a ~$18,000 median and $200,000 mean average retirement savings amount for 56 – 61 year olds. My hope is for 100/100, meaning every reader here maxes out their plans for as long as you are able.
Here are some thoughts to get you motivated to max out your 401k.
1) Remind yourself a 401k is only one leg of the retirement stool that is already broken. The other two legs of the retirement stool are a pension and Social Security. According to the Bureau of Labor Statistics about 22% of full-time private industry workers have a defined pension benefit compared to 42% in 1990. Although most public sector employees still get pensions, public sector employees account for only around 10% of the population. In other words, most people don’t have pensions anymore.
As for Social Security, the realistic calculation is that when eligible, we will still all receive Social Security checks, but at 70% of what is currently promised if nothing is changed. Given most people don’t have pensions and Social Security won’t be paid in full, the 401k is an integral part of your retirement plan.
2) Calculate a budget based on a $18,500 reduced gross income. Nobody really sits down and writes out their expenses. We’re either afraid or lazy for some reason, yet we can spend hours doing research on our next big screen TV or laptop. But for your own sake, take your current income, subtract $18,500, and multiply it by one minus your effective tax rate to calculate your disposable income e.g. $100,000 – $18,500 = $81,500 X (1-25%) = $61,125 after taxes and 401k max. Divide the annual income by 12 to get a monthly disposable income figure and work your budget from there. The bigger the buffer you can have from spending all your disposable income, the better.
3) Make your contributions automatic. As soon as you make your maximum contributions automatic, you will adapt your lifestyle to your paycheck. Automatic contributions will save yourself from yourself. It’s exactly like the government withholding federal income taxes each paycheck because they know you won’t pay your full tax liability at year end. Making your contributions automatic will make savings so much easier. You will wake up 10 years from now and be amazed at how much you have accumulated.
4) Envision your 60 year old self working the cash register at McDonald’s. One of my biggest motivators for saving and paying down debt was seeing senior citizens working minimum wage jobs. While I admired them dearly for continuing to work, they also scared me straight into saving more because I didn’t want to be them one day. Instead, I wanted to be relaxing on a beach with a Mai Tai in one hand watching the sunset with my lovely wife. The more we can envision ourselves in poverty, the more incentivized we can be to max out our 401k.
5) Do it for your family. If you’re not willing to get in shape, save aggressively, and invest wisely for yourself, then at least do so for your family. There’s not a day that goes by where I don’t think about ways in which to give my son and my wife a better life. When you know you’ll likely die before your spouse and child, you’ll start focusing on your finances much more seriously.
Diversify Your Retirement Savings
Once you start contributing like a champ to your 401k, run your 401k through a 401k fee analyzer to see how much in fees you are paying. I discovered I was paying a whopping $1,748 in annual 401k fees when I thought I was paying maybe $200 a year. Over a 20 year period, my fees would climb to ~$90,000, provided my portfolio also increased as well.
For those who seek to retire before 60, it’s important to also save and invest as much as possible in your after-tax investing account. Ideally, your goal should be to grow your after-tax investment account larger than your 401k by the time you’re ready to retire. Make your after-tax investment contributions automatic with each paycheck as well.
The chance of you working for 38 years at a company with a 401k is not high. Therefore, you shouldn’t rely on your 401k for retirement. Instead, look at your 401k as a bonus you’ll get to use once you pass the age of 60. Make sure you diligently track your net worth by using a free financial tool from Personal Capital. I’ve used their tool since 2012 and have watched my net worth sky rocket as I’ve been able to better optimize my finances.
Updated for 2020 and beyond.
Lance OA says
So the 401k fee analyzer – those funds likely outperformed the S&P to a high degree. We’re you compelled at that point of realization to change your holdings to lower expense options despite coming out wel ahead with the higher holdings?
I’m running into this problem with many of my mutual funds, I also hold the Fidelity Blue Chips. Also, I found that many of the MFs I chose have a 30 year plus track record with yearly average over that time period ranging from 12% to $16%, whereas some of the Sector ETFs and Index ETFs at Fidelity have only been around since about 2003, S&P trackers being the exception.
ZJ Thorne says
Once my business is profitable enough, I definitely intend to set up a SEP IRA. I’ll still be doing lucrative gig work, which I intend to live off of, and thus allow my business to be very generous with the SEP for a few years. Once I think that is amped up enough, I’ll return to focusing on the taxable brokerage. I don’t want to be forced to work well into my 60s. I’m counting on the taxable to get me through.
Two points: The proposed $2,400 limit MAY pass. Never underestimate the stupidity of Congress. And I’ve never met anyone whose employer contributes close to $36,000 per year to his 401k. Mine chips in an entire 1.5%, or about $1,000 year. This is a big reason why your goals by age chart is so unrealistic and unreachable for 97% of the population. Not everyone can work in finance. Thanks.
Financial Samurai says
No worries. If you believe you cannot do it. Then you cannot do it. Nobody can convince you otherwise.
When you start to believe in yourself, you should talk to people who work in a plethora of different industries were able to save at least $5000 a year in their 401k(low end column).
This is why I don’t understand the purpose of the government’s involvement in employer benefits. Why is there a specific limit for employee vs employer contributions? If there was only one tax-deferred limit per individual, then the employee would be allowed to contribute as much as they want up to that limit. If employers want to chip in (also capped at the total individual limit), then great. But as it is right now, I’m limited to 18.5K per year and getting anywhere near the total retirement limit of 55K requires too much reliance on the employer.
Interesting Future Post Topic: How many retirement accounts can one have?
For FIRE enthusiasts who are part entrepreneurs, part employees (with the 9-5 grind), can we have a solo 401k and a regular 401k maxed out?
If the limit for a solo 401k (with the employer contribution) is 55,000, and the regular 401k is 18,500, a nest egg of 73,500/yr sounds really nice.
Is it possible?
I have only a small 401K, but I have a big $1M++ traditional IRA. I started to do some tax planning about 10 years ago and quit funding the tax deferred plans, the reason is RMD. You loose complete control of the tax bill once your money is annuitized. Instead I started aggressively loading up on post tax stocks, and I started aggressively loading up on tax loss harvesting. When I retired I had $500K of tax loss harvested after living through 2 pretty dramatic recessions. You can use your capital loss to balance your capital gain so if I have $1M post tax invested with a cap gain of $500K my million is tax free when I go to sell. I call this the rich man’s Roth.
I recently sold $600K of post tax stock (selected lots) to live on for the next 5-6 years and it generated a $100k tax bill, paired it with $100K cap loss and my tax bill is zero, and I still have $400K of cap loss to apply to post tax money in the future. During this time I’m going to aggressively Roth convert my IRA’s to Roth’s at the 15% tax rate to get my RMD under control, and to try to get my IRA’s under $1M. I won’t take SS till I RMD at 70, which means my only “income” that will be taxed is the money I Roth convert, which is why I need the cash to live on. I have the cash in short term muni’s for some tax free inflation protection. Hopefully I will be able to get myself into that lower tax bracket before RMD
The old “you’ll be in a better tax bracket” is nonsense if you are being aggressive in your saving and investing. It is financial industry boilerplate to sell you mutuals. The government wants their money period. What you have is your NW minus spending, market conditions, inflation AND TAXES. If you’re tens years out from FIRE you have time to plan.
The solution to the 401K dilemma is to pay the taxes, save even more aggressively, put the money into post tax stocks using tax trimmed vehicles and harvest cap loss when the opportunity arises. Keep your coupon producers and dividends in a tax deferred vehicle. Often even though your portfolio may be positive overall, at least some of your tax lots will be underwater during a downturn. When you die your LT cap loss dies with you, in other words it doesn’t continue to your next generation but while you are alive its like owning gold. I consider it a separate asset category.
SS used to be tax free, till one day it wasn’t. Having money outside tax advantaged plans is like buying some insurance. You have to ask yourself “just where is the money stored?” The answer is 401K’s and IRA’s so where do you think they are going to go?
Dood, el Farbe says
Gasem, interesting comments, thanks.
I’m curious – is the reason you make the cap loss harvesting part of your strategy (instead of just waiting for those under-water lots to come back up), because you figure that by the time they do come back up, given a diversified portfolio, something else will likely be underwater by then?
The most important step to maxing out a 401k is finding a good job. I can’t imagine many people who are making $40k-$60k per year are throwing $18k into their 401k., although contributing as much as possible is still a good idea.
For those of us who are fortunate enough to be able to, it definitely makes sense to take full advantage of it. Having the ability to save for retirement while getting a nice tax deduction is pretty great.
I’m constantly second guessing, 401k plans. My wife’s employer does not match so she doesn’t contribute anything. I am self employed with no plan either. Instead we save our money and invest in buying property every few years. We have 2 young children, I hope we haven’t made a mistake by doing it this way.
Limiting the 401K contributions to $2400 sounds too crazy. Like you said Sam, this would discourage lots of people on trying to save for retirement with the and IRAs limit at a $5500 yearly contribution, we would have to look at other avenues like your investment account as an alternative to be your retirement account.
The way it is now is fine although I would like the 401K limit to increase to up to $30K but leave it the way it is.
I get a pension from work, but am maxing out my 401k and 457 ( up to 36k per year), with no match, due to my high taxes ( Single and no kids, making six figure income)!
I plan to retire by the age of 50, where I can take a reduced pension. And use my Roth and after Tax investments and hopefully a rental income. Anyways the point here being is that I personally believe for people in higher tax bracket maxing out all the pre-tax accounts even if there is no match is a no brainer. Remember you get to at least keep some of the money for yourself instead of handing it to a government who is not even going to spend the money on you and waste it in another useless war..
There are ways to get money out of your 401k and IRAs penalty free before reaching the age of 60( roll it to an IRA then convert to Roth while your income is low and pay the taxes then wait for couple of years)
Recovering Engineer says
Does anybody else live the with fear that in the end the government is going to completely screw over us savers? Especially as a young person, anybody under their mid-30’s or so, I get worried that the rules are going to change in our faces with no recourse. When I look at the lack of savings for the majority of the country, the declining feasibility of Social Security and Medicare, shrinking population, and wealth dispersion I see a looming disaster.
It is totally out of my control so it doesn’t change my aggressive savings but I can never shake the fear that at some point in the future the government is going to see the only solution as massive redistribution from those of us who have saved to those who didn’t. Whether that comes under the auspice of a new tax specifically on retirement withdrawals or something more blatant like a blanket net worth tax I can’t predict. I fear it is almost inevitable as we continue to perpetuate the lie that equality means equal outcomes rather than equal opportunity which not only allows for redistribution but makes it a moral imperative.
Dood, el Farbe says
Yes, I do worry about the institution of new types of taxes, for example something like the blanket net worth tax you mention, where every year the gov’t takes a chunk of your accumulated savings until you only have a “fair share” amount remaining.
Absolutely, especially after seeing the groundswell of support for Bernie Sanders and his platform this last election cycle. The ‘equal outcomes’ expectation is spot-on. Wiping out college loan debt (only as an interim until free college arrives), guaranteed jobs and income, nationalized healthcare, etc. are all positions that a very, very large (and growing) population in this country have.
Like you, I’m concerned that one day the federal gov’t will effectively seize the assets of anyone* above a certain line of ‘appropriate’ wealth for the ‘general welfare’ of the people. This may sound a bit far-fetched, but that’s the exact reason for and definition of the individual income tax. Now imagine, instead of just measuring and ‘taxing’ on the basis of income, which a lot of people of means and political influence have already faulted (e.g., Warren Buffet), they do so based on the concept of wealth (similar to the inheritance/death tax).
*anyone not including them and those they directly rely on or care about (see the ACA exclusions)
As the only person who reads this forum who is running for President (as far as I know), it needs to be stated that this “fear of government” taking your wealth should not be your concern.
I personally don’t support a wealth tax, nor do I support punishing savers who do a job of accumulating a small nest egg over the course of their lifetime. And the 401k is one of those vehicles many people use to get there, but a cap is worth discussing. When it increases $500 it only benefits mostly wealthy people because of the cycle of perpetual debt that most people find themselves in, mostly through no fault of their own. Those who can really max out their 401k are single individuals who make more than $70,000 a year, higher if you have children you need to care for. 82% of Americans made less than this number in 2016 (yes, it is that high).
What you do need are very high tax rates for outrageously large incomes (i.e. anything over $1mil per year starting at 55% and as high as 91% for those who make over $500mil a year). Additional, we need to have high taxes on the estates being passed down. I’ll give you $8mil tax free, after that you start paying at 55% tax rate, no exception.
We need these types of programs to better align incentives for the average worker. When your CEO takes home $25mil+ a year in any form, stock or pay, they are sucking resources from the greater economy as a whole. That meager cost of living adjustment you get could have been much greater had executives not been able to reward themselves through earnings managment and the ability to recognize stock option expense outside of GAAP earnings (seriously, who allows Wall St. to get away with this?)
If far fewer people lived paycheck to paycheck, and fewer people were subjected to less debt, or had an equal opportunity at achieving financial freedom even if they were born into low income or poverty you would be feel much more comfortable. You would be encouraged that governement resources are actually making a difference (tuition free college / single payer healthcare / climate change reversal) and you wouldn’t fear them taking any more of your hard earned money because there are less financial issues weighing down the vast majority of Americans.
I want to change these things, I hope you are open to major change and ideas. It’s entrepreneurship at it’s finest.
Unfortunately one would be lucky to be working at Micky D’s at 60. I stepped inside one a few weeks ago, having not eaten at one in years, and was amazed that there are self ordering machines to place your order and pay without any human action. I don’t think there will be many jobs available in the near future for this type of work. Best bet is to start a business that provides recurring income, invest, and fluff up that 401K.
Dood, el Farbe says
Automation of the sort you describe may have come to the fast food industry of its own in any event, but cities forcing increases to local minimum wages and the “we demand $15/hr” movement surely hastened its arrival.
Dave @ Married with Money says
I’m pretty pleased with this, though my OCD isn’t happy with switching from $750/paycheck to $770.8333333 :)
It’s been a tough year for 401(k) on our front because of some job changes, which means I have only been eligible for one for about half the year so far. It’s made it tough to save as much in it as I’d prefer.
Jim @ Route To Retire says
I’m pretty excited about the new limits – my employer offers a 35% match on every dollar invested with no limit (up to federal max). So, I’ll take an easy 35% return on my money any day!
I heard about that $2,400 max being tossed around. There’s no way that something like that could get passed without ticking off a huge percentage of Americans.
Did you catch that the average 401 k balance is $200,000- not bad!
However, the median is $18,000 – amazingly BAD!
I wonder what the average # of 401k accounts per employee or household is? In my case, I have 3; my current, plus two accounts from old employers. I chose not to roll them over for a couple of reasons, including investments in my old companies’ stock and investment choices in those plans not available in my current plan.
But that means each of those accounts have relatively small balances (approx $30k each) compared to my primary 401k account.
Mr Wheat says
0.74% is a big drag on returns. I’m a big fan of the total market VTSAX at .04%.
Grant @ LifePrepCouple says
So for those of us planning to retire well before age 60 we should be contributing more to a regular brokerage account than our 401k?
Grant if you will need that money before the non penalty age then yes.
This is what I’m doing. I only contribute up to the company match, because obviously not going to pass up free money. Other than that, I put the money in a regular brokerage account because a target retirement age of 45 is well before the non-penalty age.
Grant @ Life Prep Couple says
I would love to see the math. Is it possible that you are still better off putting the money in a 401K and taking the 10% penalty because of the tax savings? Probably not but I would still like to see it.
I’m not sure on the rules but can you use the IRS rule 72t to access your 401K and IRA early?
While this is promising. I am concerned about the new GOP Tax Plan to reduce 401k limits to $2,400. Any thoughts on this?
This is not “new”. It has been discussed by the GOP for years.
The $2400 is probably a low first number so a more reasonable amount won’t seem so bad.
Perhaps what would make sense is 15% of an average income being tax deferred and anything over that being after tax. I wouldn’t be surprised if that is the final agreement.
This tax reform is likely to hit the top quintile – excluding the top 5% – quite hard.
Besides the 401k talk, they have also considered making company heath costs taxable (both your own contributions and what your company spends).
Studies show that the vast majority of people have no idea what they pay in taxes, so they can be convinced that it is better no matter what the reality is.
Why must the federal government get so involved with employer benefits? Why isn’t it enough to just set an individual 401K limit without, yet again, dictating how an employer compensates their employees? Individual limit… 55k… simple. If an employer finds that offering to subsidize employees’ 401ks gets the kind of people they’re looking for, then they should be free to do that.
The same goes for health insurance, time off (including maternity leave), etc.
Dood, el Farbe says
Derek, I am not positive but I think it goes to the notion that, at its base, an employer match into 401(k) is essentially additional untaxed compensation.
With no limit, and with a typical matching scheme (set percentage of salary and bonus), then the most highly compensated employees could theoretically get enormous amounts of additional tax-deferred compensation.
All the above said, I don’t think it’d bother me personally if they removed the employer cap.
On the other hand, it’s pretty hard to exceed the current cap at, say, a common matching amount of 6% of salary and bonus. You’d have to be making more than $600K.
What I’m saying is an individual cap would be sufficient and would also not limit people without an employer contribution from saving (tax deferred) as much as those that do have one.
If the individual cap was 55k, then it’s 55k. Who cares what portion comes from the individual and what comes from the employer.
Maxing out the 401k is the easiest way to build your foundation. Everyone young person needs to max it out ASAP. I’m shooting for the mid range. I have a bit more than $500,000 in my 401k and I’ll probably stop contributing soon. Once Mrs. RB40 retires, then saving on taxes won’t matter much. We’ll be in one of the lower tax brackets anyway.
Great, but I’m in another country and can’t contribute so I’ll just use the local alternatives.
Unfortunately, I think we will be in about the same or higher tax bracket when my husband and both reach 70 1/2 (RMD). We got 2 inherited IRA, total around 940K. Both of us max out our 401k every year. Our tax bracket is 33%+state+local=42% and 3.8 % Obamacare investment tax( since we have rentals). We can pay tax now or pay later. Earned income is the worst. Max Out 401k pre-tax was a good idea until we got the windfalls. I wish we have put money in Roth 401k instead when we were at our 20’s-30’s. Now we just hope the future tax won’t increase too much.
It is much harder to save than I thought it would be. Only making a little over 50,000 a year I am only saving 6%. When I run the numbers it seems feasible but in reality I just can’t contribute the max. Medical bills are killer to the budget.
Lily @ The Frugal Gene says
Haha the cover photo is a rainbow! My husband got the news last night and told me, he’s happy, more savings!
But I think they also increased the FICA tax limit so there’s more taxes for higher earners.
Signing up for my previous employers 401k and pushing myself to get to the point when I was able to max it out was one of the smartest things I did financially. I owe it to Financial Samurai for getting the motivation to do so and am blessed that I feel good about my retirement savings to date. Since I don’t have a 401k plan anymore, I contribute to a SEP plan and also save/invest after-tax earnings.
Even though a $500 increase in the contribution max doesn’t sound like a lot, I’m glad they did raise it and it’s totally worth taking advantage of every dollar you can. The savings really do add up well over time if you can stick with it.
Eric R says
Breaking up into 5 year blocks, here are the average annual increases:
Fort a couple of decades, the limit increased roughly with inflation, ie the amount you can contribute was about the same year-to-year relative to buying power. In the last 10 years, the increases have significantly lagged behind inflation.
I’ve always contributed to a 401k but I’ve also always been envious of those people who get a match. Unfortunately a 401k match is not a standard offering in the healthcare field. But not contributing at all is even worse!
Sam – what are your thoughts of the saving limits being talked about by Congress? There is discussion of limiting it to $2,500 of before tax dollars with everything else having to be after tax dollars similar to the Roth IRA.
Balanced Dividends Mike says
Any increase is nice, but hopefully it will be greater than $500 next go round.
As recently commented on your post financialsamurai.com/age-people-retire-america/:
Retirement is a number – not an age… unfortunately, many won’t be able to maintain their current lifestyle once they stop working.
Sam – reviewing a few other articles you’ve posted and the studies you’ve referenced, it’s interesting that not even tax-advantaged accounts – let alone having multiple sources of income and/or investments in taxable accounts – are fully utilized.
Perhaps it shouldn’t be surprising considering the income-to-debt and savings ratios in the studies.
Overall, I’m also leaning toward viewing my 401(k) and IRA as a “bonus”. Right now, they’re both pivotal parts of our plan, but that’s why we’re working to focus on building other sources of income.
It was a hard decision, but I decided to temporarily STOP contributing to my 401k:
Steve @ familyonfire.org says
I strongly believe that 401k plans should be something people should have to opt out of rather than opt in. If more companies auto enrolled people upon employment the participation rate would be much higher.
Ms. Frugal Asian Finance says
The opt-out solution is a great idea. I think many people don’t contribute to the 401(k) plan because they are not aware of the benefits of such plan or they don’t know how to contribute in the first place.
The question is when the opt-in is automatic, what percentage of people’s annual salary contributed to the 401(k) plan should also be automatic. It might require more analysis than what my basic brain can offer.
Budget Kitty says
People also need to be better educated on the benefits of a 401(k). If not they’ll just opt out and that defeats the purpose of auto-enrollment. Or they see money coming out of their paychecks and say “Hey, what is this 401k tax?? I want my money back!!” It happens.
The 401k is one of the pillars of our investing plan. It’s hard to beat essentially tax free returns. That’s especially true when you realize you’ll likely be in a lower tax bracket when you start withdrawals. Which provider did you go with for your individual 401k?
Well, I don’t know how many retirees actually find themselves in higher tax brackets instead of lower brackets.
It really depends on what they do with tax laws in the long run. Personally I’m not sure my tax rate will be less in retirement. I can hope.
Margin of Saving says
Remember there are minimum required distributions for a 401k. So if you do a good job planning for retirement, you may be paying a lot more tax than expected (hopefully!)
I know I will be. A pension plus social security and same for my wife. Throw in the RMD’s and I’m in the same bracket. Won’t take but a few thousands to get to the next.