When most of us think about how much we can contribute to our 401k, we only think about how much we can contribute as an employee. That limit is $18,500 for 2018, up from $18,000 in 2017. I really hope everyone maxes out this year and every year for the rest of their working careers.
Yes, some of us get paltry company 401k matches up to a certain percent of income or up to a particular absolute dollar limit. But for the most part, we’re left fighting for our own retirement well-being since the pension system is going the way of the dinosaur.
The reality is an employer can contribute a heck of a lot more than 3% of your salary, or whatever their company match may be. They just need to have the profits and the desire to do so!
After about the fifth year at the firm I retired from, I started receiving “profit sharing” on top of my $5,000 401k company match. I always maxed out my 401k while I was there from 2001 – 2012. During good times, such profit sharing bumped up my overall company 401k match to $25,000 during some years. Ah, those were the good old days.
For those of you who are employed, I suggest familiarizing yourself with your company’s pre-tax retirement savings programs ASAP. You might be leaving free money on the table. For those of you looking to join a new firm, inquire about their retirement savings program. It could be worth a fortune over time.
Historical 401k Contribution Limits
The following is a chart I put together on the historical 401k contribution limits. They are the same for those of you with 403b plans, and most 457 plans. The 401k was first enacted into law in 1978, but didn’t gain popularity until around the mid-1980s. The rows highlighted in blue were particularly good times to invest in the stock market.
As you can see from the chart, your employer has the ability to contribute $36,500 to your 401k for a total pre-tax contribution of $55,000 for 2018. Great employers tend to also make great profits and want to attract and retain the best people. Profit sharing is one of the biggest benefits of working at a blue chip company.
For those of you working at startups, know that you are not only foregoing a higher salary working at an established firm, you’re also foregoing potentially hundreds of thousands of dollars in employer profit sharing as well. Given most startups are loss-making or barely profitable, many don’t even offer any 401k matching, if they have a 401k plan at all. Therefore, please be fully aware of all your company benefits before making a decision. That equity component best be worth something!
401k Savings Potential By Age
The 401k should just be only one leg to a modern day four-legged retirement plan. The other three legs include: social security, after-tax stock and bond investments, and real estate.
Your estimated social security check should be discounted by 30% because the program is underfunded by 30%. Your after-tax stock and bond portfolio should try to match the amount you accumulate in your 401k. Finally, it’s a good idea to at least get neutral real estate by owning your primary residence due to inflation.
After listening to more feedback from the community, I’ve updated my 401k savings potential by age even further. It’s now broken up into three columns because maximum contribution limits were lower in the past and everybody reading this article is a different age.
Older savers are defined as those of you over 45. Middle age savers are defined as those of you between 30 – 45. Younger savers are defined as those of you under 30-years-old.
You can also look at the columns in terms of performance, too. Some of you will inevitably invest better than others. As a result, you may have $2,000,000 in your 401k on the high end instead of just $500,000 at age 50. Meanwhile, some of you may work for more generous employers who share more of their profits with you.
The low-to-high end amounts by age should encapsulate 80% of you who’ve consistently maxed out your 401k contributions every year you’ve been employed. If you want, you can use the table as a guide for your total savings by age.
401k Contributions Should Be An Afterthought
Once you’ve decided to max out your 401k, there’s nothing more you can do except be a loyal employee. You’ve got no control over how much your company contributes. But we can assume there is a correlation between the length you are at your firm and the amount of benefits you will receive.
There’s a real issue today where employees job hop like children afflicted with attention deficit disorder. Can you blame employers for creating a vesting period or delaying their 401k profit sharing until after a certain number of years?
Your goal as a financial freedom seeker is to control what you can control. Actively work to bolster your income to your maximum potential. Working 40 hours a week is an arbitrary number. Learn how to leverage the internet to build your brand and platform. Always look to build new income streams through stocks, bonds, real estate, and alternative investments. Finally, don’t forget to have fun doing so.
You can’t withdraw from your 401k until 59.5 anyway without incurring a 10% penalty. Therefore, you might as well use all the time between age 18 – 59.5 to build additional wealth and income streams. Who knows, you might build so much that you’ll be able to retire much earlier than expected!
How’s your employer match / profit sharing? You on track to a robust 401k balance by the time you retire?