The 401(k) maximum employee contribution limit in 2023 is $22,500, up from $20,500 in 2022. The employee maximum 401(k) Contribution limit in 2022 is $43,500. Therefore, the total 401(k) contribution limit for 2023 is $66,000, if you can find a generous employer.
One of America's biggest retirement failures is allowing for employees to decide how much they should save for retirement. Given the choice between spending money on cheeseburgers, cars, fancy clothes, shoes, vacations, electronics and more cheeseburgers or saving for a retirement decades away, obviously the majority of Americans are going to choose the former.
There is no wonder why roughly 65% of Americans are overweight and the median retirement savings for all families is less than $10,000.
We should have adopted a forced retirement savings system where companies automatically deduct money from each employee's paycheck for retirement, much like how taxes are automatically deducted.
But the good news is that Americans with a 401(k) plan can now put away a maximum $22,500 for 2023, up from $19,000 in 2019. Below are the details from the IRS.
Historical 401(k) Maximum Employee Contribution Limit
To give you an idea of what the historical 401(k) maximum contribution limits are, take a look at this chart I put together. It shows the historical maximum employe contribution limit and employer contribution limit.
As you can see from the chart, there's also an employer maximum contribution plan limit to consider. This is where the employer 401(k) match and profit sharing come in.
For 2023, your employer has the ability to contribute an additional $43,500 on top of your maximum employee contribution of $22,500.
Now of course, an employer needs to have the profits and generosity to do so. But you can see how sticking with a profitable and generous employer over the long-term can do wonders for your pre-tax retirement accounts. $66,000 a year is a lot of money pre-tax to put away!
The New Three-Legged Retirement Plan
Given less than 15% of Americans have pensions or will receive pensions, no longer is having a pension part of most American's retirement plan. Therefore, we can throw pensions out the window for future generations. For those of you with pensions, bless you. Your pension is perhaps more valuable than you realize.
Given our Social Security system is underfunded by 20% – 30%, the government will either cut the average Social Security benefit by 20% – 30%, or raise the minimum age eligible for collecting Social Security.
As a result, relying on a government that has perpetually mismanaged our finances is not a wise retirement strategy. Besides, the average monthly Social Security benefit for 62 – 70 year olds is only $1,000 – $1,300 according to the Social Security Administration.
The new three-legged retirement still now consists of: personal pre-tax savings, personal after-tax savings, and personal hustle. Or, you, you, and you.
Everyone Should Contribute The Maximum Employee Contribution Limit
Everybody who has the opportunity to contribute to a 401(k) plan should. According to the Bureau of Labor Statistics, only about 55% of the American workforce has access to a 401(k) and only about 38% of the total workforce participates.
Meanwhile, for those who do participate, the average 401(k) contribution was only about 6.5% of salary when employers didn’t contribute and 11% of salary when employers contribute. Only 18% of 401(k) participants save more than 10 percent of their salary for retirement.
Everybody should figure out a way to contribute the maximum to their 401(k) savings each year, even without a company match. Your goal is to minimize your taxable income, allow your investments to compound tax-deferred for as long as possible, and then build a large enough after-tax portfolio to give yourself options before the age of 59.5.
Post-Tax Retirement Accounts Matter
Here is my chart providing guidance of how much you should have in your 401(k) by age (Pre-Tax Accounts) and how much you should have in your After-Tax Accounts by age.
Clearly, in order to build this type of wealth, it will take a tremendous amount of discipline. You can’t go blowing your money on stupid things you don’t need. You need to continuously reinvest the large majority of your savings into risk-appropriate investments.
But there is an upside to eating less and spending less. You'll likely live a longer, healthier life with more money in the bank. Your self-esteem might even see a big boost because looking good and having more money feels good. That's not a bad trade off.
The third leg of a well-rounded retirement plan is earning money doing something you enjoy: personal hustle. One of the most dangerous things about post work life is letting your mind atrophy. The more you can stay active post traditional work, the better your retirement lifestyle.
In my case, I stay active in post-work life by:
- Being a stay at home dad
- Coaching high school tennis for 3-4 months a year
- Writing daily
All three activities have a monetary component that allows me to better preserve my retirement nest egg. You'll discover that once you retire from traditional full-time work, it becomes impossible to drawn down principle that took you decades to built. It just feels dirty.
Being a stay at home dad allows us to save ~$3,000 a month on childcare. Coaching high school tennis brings in about $1,250 a month and allows me to build relationships with other members of the community. While writing daily on Financial Samurai keeps my mind fresh and brings in advertising revenue.
Don't rely on anybody else to secure your retirement future. Not the government, not your company, and definitely not your parents or relatives. If you can depend on only yourself to fund your retirement, all other retirement benefits like a Social Security will simply be a nice bonus.
At the very least, you must contribute the maximum employee contribution limit every year!
Recommendation To Better Plan For Retirement
Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. After you link all your accounts, use their Retirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible. When it comes to retirement planning, it's much better to end up with a little too much. Ending up with a little too little is no good.
I’ve been using Personal Capital since 2012. Since then, I have seen my net worth skyrocket thanks to better money management.