The employer maximum contribution limit to an employee’s 401(k) rises from $37,000 in 2019 to $37,500 in 2020. Meanwhile, the maximum employee contribution limit rises to $19,500 for 2020, up from $19,500 in 2019.
Given the increases on both the employer’s side and the employee’s side, the maximum 401(k) contribution per employee is $57,000. This is very important since it puts into perspective your employer 401(k) match policy or profit sharing policy.
When an employer can contribute up to $37,000 a year, perhaps a $3,000 annual contribution isn’t very impressive. Be aware when looking for new job opportunities.
Historical 401(k) Maximum Contribution Limits
To give you an idea of what the historical 401(k) maximum contribution limits for employees and employers, take a look at this chart I put together from the IRS database.
As you can see from the chart, the employer’s contribution limit is a significant portion of one’s total 401(k) contribution plan.
Therefore, each employee needs to choose an employer which has a high 401(k) match or profit sharing plan. Being able to contribute a maximum $56,000 a year in pre-tax retirement savings plans is huge.
During my last years of work, my old employer was contributing roughly $20,000 a year in profit sharing on top of my $16,500 a year in maximum contribution at the time.
Do not underestimate working for a profitable, generous employer. Working for a startup may sound sexy, but many startups don’t make it and are not profitable enough to even offer a 401(k).
Depend On Yourself To Retire Comfortably
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.
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.
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.
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.
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. The best case is doing some work you enjoy that also brings in some money to better protect your retirement nest egg.
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
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.
Working for a profitable employer with a healthy retirement savings plan cannot be underestimated. Don’t just focus on the income figure of your compensation package. Also look into your benefits package to see what type of health, education, and retirement benefits your employer offers.
Recommendation To Better Plan For Retirement
Manage Your Money In One Place: 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 that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. When it comes to retirement planning, it’s much better to end up with a little too much than a little too little.
I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.