The maximum 401k contribution limit for 2022 increases to $20,500 from $19,500 in 2021. Your 401k is one of the three legs of the new retirement stool: you, you, and you.
I’m surprised the maximum 401k contribution limit is jumping by $1,000. Historically, the limit usually increases by only $500 every two to three years.
Inflationary pressures are likely the main reasons for such a high contribution limit increase. For example, the Social Security Administration raised its cost-of-living-adjustment in 2022 by an impressive 5.9% to account for inflation.
If you are 50 or older, you can add up to $6,500 extra per year from $5,500. This is the government’s way of allowing older workers with typically higher incomes to catch up.
Further, the maximum 401k contribution your employer can contribute for 2022 is $40,500. This brings the total maximum 401k contribution between employee and employer to an impressive $61,000.
Always Take Advantage Of The Maximum 401k Contribution Limit
I always recommend maxing out your 401k as fast as you can. Once you get into a max habit, you’ll rack up some big bucks in no time.
Maxing out your 401k is a learned habit that gets easier over time. Given the contributions are pre-tax, you won’t feel as much pain compared to saving with after-tax dollars. In other words, at a 25% effective tax rate, contributing $20,500 will feel more like you’re contributing $15,375.
So many people don’t even bother to try maxing out their 401k because they don’t feel like it’s possible. But once they try, they kick themselves for wondering why they didn’t max out their 401k sooner.
Below is a simple chart to see how much you can accumulate in your 401k by age or years worked if you contribute $19,000 a year starting today.
The chart is obviously more helpful for younger folks, given older folks had lower maximum contribution limits in the past. For example, when I first started maxing out my 401k in 2000, the historical 401(k) contribution limit was only $10,500.
I’ve also included my high-end 401k target amount by age. It is based off continued maximum contributions plus a constant 4-8% annual return. My high-end 401k savings target can also be considered your overall total savings target. It can include after tax savings as well.
The numbers are for “ideal” conditions. We all know that life, recessions, and buying things we don’t need gets in the way of savings and returns all the time.
What You Could Have In Your 401(k) If You Max It
Here’s what you could have in your 401k if you contributed $19,000 a year for 38 years. You will end up with at least $722,000 and most likely over $1,000,000 by the time you reach 60.
Having $722,000 at least by age 60 doesn’t sound too shabby to me. The numbers don’t take into account any positive returns or employer match either. If we do take into account reasonable market returns, you could have about $2,500,000 in your 401k by age 60.
Given the stock market has provided a historical ~10% annual return, everyone who maxes out their 401k every year will likely have well over $1 million by the traditional retirement age. That’s right. The majority of us should be 401k millionaires by age 60.
Unfortunately, thanks to inflation, in 38 years it will probably take $6 million or more to replicate the wealth of $1 million dollars today! Good thing the maximum 401k contribution limit will probably continue to go up every two or three years. By 2044, we could be looking at a $50,000 annual employee max contribution limit.
You’ll notice that starting at 35-40 years old, the 401k amounts really starts to rocket higher. This is because you have now amassed a large financial nut. Once you get to at least $250,000, your investment returns may start surpassing your contributions. That’s an amazing feel.
For example, a 8% return on a $300,000 portfolio = $24,000. That’s greater than the current maximum 401k contribution limit. If you add on a $19,000 contribution, you’ve just increased your 401K by $43,000.
Once you’ve built a sizable investment portfolio ($250,000+), focusing on a proper asset allocation of stocks and bonds is very important. You want to continue making money during a bull market. But you also don’t want to give up more gains than you are comfortable losing.
What You Could Have In Your 401k With A Bigger Contribution And 8% Annual Returns
Given the maximum 401k contribution limit is $20,500 in 2022, here’s another chart that shows how much you could have in your 401k if you start maxing it out in 2022. In the right column, I’ve assumed an 8% compound return. Just a $1,500 increase a year makes a huge difference!
If you contribute $20,500 a year starting in 2022, you could end up with close to $5 million by age 60. But given the maximum 401k contribution limit will increase over time, you will likely end up with even more money.
More of you will achieve the ideal net worth for retirement than you think. The power of compounding and consistency is real. Don’t scoff at the numbers and think they are unachievable. These past two years alone have demonstrated that tremendous wealth accumulation is possible for those that continue to invest.
Tips For Maxing Out Your 401(k)
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 we will still all receive Social Security checks in our mid-60s, but at 70% of what is promised if nothing is done.
Given most people don’t have pensions and Social Security won’t be paid in full, the 401k is the baseline defense for retirement. Thus, we must build upon our after-tax investments and alternative income streams to develop financial buffers for maximum financial security.
The new three-legged retirement stool consists of You, You, and You. Mentally forget about Social Security or a pension taking care of you in retirement. If you can get either, consider yourself blessed.
2) Calculate a budget based on a reduced gross income equal to the maximum 401(k) contribution limit
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 $20,500, and multiply it by one minus your effective tax rate to calculate your disposable income e.g. $100,000 – $20,500 = $80,500 X (1-25%) = $60,375 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. Making your contributions automatic will make savings so much easier.
Your goal is to now fund your taxable investments, such as a brokerage account or rental property portfolio. The larger you can build your taxable investments, the more you have the potential to generate passive income and retire early if you want to. After all, your 401k(k) can’t be touched without penalty before 59.5 under normal circumstances.
Related: I Could Have Been A 401k Millionaire By 40 If I Stayed At My Job
3) Envision your 65-year-old self greeting customers at Walmart.
The biggest inspiration I get for saving and paying down debt is when I see senior citizens working minimum wage jobs. I admire them dearly for working. I’m also scared straight into saving more because I don’t want to be them someday.
I want to be relaxing on a beach with a Mai Tai or eating an eggs Benedict with a mimosa on a yacht in the Mediterranean. The more we can envision ourselves in poverty, the more motivated we’ll be to, at the very least, max out our 401k.
Once you start contributing like a champ to your 401k, run your 401k through a free 401k fee analyzer to see how much in fees you are paying. I discovered I was paying a whopping $1,700 in annual 401k fees I had no idea I was paying!
I quickly sold out of a couple actively managed mutual funds that weren’t performing great and into some low-cost alternatives. Remember, the more you have, the more they will want to make off you. Now I’m only paying about $600 a year in fees on a ~$400,000 portfolio.
4) Think About Your Legacy In Retirement
You either plan to spend all your money before you die (YOLO Retirement Legacy) or you plan to create a perpetual giving machine after you die (Legacy Retirement Philosophy). There is no right or wrong retirement philosophy to choose from. Only the one that best aligns with your beliefs.
However, if you plan to do good after death, then you will be more motivated to max out your 401(k) and build as many passive income streams as possible. This way, you can ensure your legacy lasts long after you are gone.
Personally, I would like to leave enough money for two charities that will given them money from my estate for 100 years after I’m gone. Wanting to leave a legacy is also why I’ve been writing on Financial Samurai since 2009. Helping people after I’m gone while also making my kids proud feels good.
Take advantage of the maximum 401k contribution limit every year. You won’t regret your contributions 10 years from now.
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Solo 401k via BiZ goes up to 60k. As a biz owner, are you using this Sam?
There are a lot of articles on maxing out your 401k, but if you have an HSA with an investment option, I think that is too often overlooked.
I have coworkers who are contributing highly to their 401k, but fail to contribute enough to their HSA and I think that’s a mistake. If you only have enough income to max out one or the other, I think the HSA should have a higher priority. It’s pre-FICA, so its tax benefits are even greater, and it has the potential to be tax-free upon withdrawal, which a 401k doesn’t.
There are a couple drawbacks (20% unqualified distribution penalty, must be 65 to make regular income withdrawals) so it’s definitely smart to invest in both HSA and 401k. Maybe I’m missing something, but it seems to me like we should be encouraging the average person to invest enough in a 401k to get company match, then max out HSA contributions, THEN max out 401k contributions.
I’m pretty sure this is the order of operations that’s recommended by most financial pros that are really in touch. It’s probably not as common though since most people don’t have access to a HSA- it gets glossed over.
Thanks for sharing, Sam, as always. Your thoughts are appreciated and insightful.
I would note that the 10% avg. return is not reality. This does not take into account major drawdowns like 2008 and prolonged bear markets like we had in the 70s/80s. Protecting against major loss is key to generating positive returns over decades. Given everyone’s timeline is different, the 10% avg. return thing is really just a fantasy and not “reasonable” to assume.
I agree that it would be aggressive to assume average 10% returns a year, especially since the vast majority of retirement portfolios are not 100% in equities. I would use more of a 6% to 8% percent return assumptions when modeling for retirement.
In my retirement analysis I have used a conservative 5% and 3% inflation.
This year my inflation number is probably low. The prices in the grocery store and fuel is WAY over 5% this year.
That’s very true, the 10% average return is just an average and everyone will be different based on timing. Averages are not often the reality, some will be higher and some will be lower. Assuming past returns hold true in the future (not necessarily a given), the longer your time horizon you have to invest the more likely it is you’ll hit the 10% return. So for someone just starting their career now and maxing their 401(k) I think it’s reasonable to expect, on average, a 10% return, so long as you are aware that it could end up slightly higher/lower in the end.
And you’re right that there are protected bear markets and recessions, which can drag down the average, but it’s also worth noting that there are also prolonged bull markets as well. So you could very well end up above the 10% benchmark as well, depending on timing. Averages work both ways.
Of course, this is exactly why people generally shift out of equities and into bonds or other more stable investments as they approach retirement age.
Keep in mind the catch-up contribution available to workers who are at least 50 years old. The 401(k) catch-up contribution is $6,500 for 2021 and 2022, bringing the total max contribution to $26K.
A person who maxed out the contribution + catchup contribution at $26K per year, along with a employer match of $3K per year, and who did this for 9 years, starting back in 2010, ceasing the contributions in 2019, and coasting since then, today has $500K.
Another person who contributed $26K per year over the last 2.5 years (but without the 3K employer match) has already accumulated $100K due to the great market returns we’ve seen, in this case using a fairly conservatively allocated diversified portfolio.
Both of these examples are without resorting to aggressive portfolio allocations.
This is one of the best tax benefits that is available to most middle income folks — if your state and federal marginal rate is 25% then you would have had to pay $6500 on that $26K, whereas instead that amount goes into your account. Even better for those in the higher tax brackets.
So nice to see they increased the max contribution by $1,000 for 2022! That’s unusual as you mentioned, but is a very good thing. I remember not believing I could max out my contributions myself just like a lot of people, but once I started I managed just fine. We often fear change and pushing ourselves financially, but it can really pay off in droves. Compounding is powerful!
This math looks like it’s using some very aggressive numbers.
18 years for $1M?
The math I used –
-quarterly compounding interest at 1.5% – That’s a 6% annual return, assuming 19k for 5 years
-quarterly compounding interest at 1.5% – That’s a 6% annual return, assuming 21k for 5 years
-quarterly compounding interest at 1.5% – That’s a 6% annual return, assuming 23k for 4 years
-quarterly compounding interest at 1.5% – That’s a 6% annual return, assuming 25k for 4 years
That, more or less, is 6% a year return, and bakes in some limit growth from 19-25k over the next 15-20 years.
A time value of money calculator puts this at $674,405.
The employer portion would be $227,958, assuming same math as above, but using a $6,000, 7,200, 8,000, 8,800 and employer contribution a year. This assumes you’re getting 6% (you probably aren’t) and have salary growth from 100-150k over the 18 years.
That’s 900k.
I dunno. Assuming 6% earnings is pretty high. Assuming high salary (six figures + growth) and a high match at 6% is pretty high and I still didn’t make it to $1M.
This third column basically seems like the path for people that honestly don’t need to think twice about matching their 401k.
Actual case in point: A person starting at age 49.5, working until age 58.5 and coasting for 2 years accumulated $500K.
This is someone who contributed $29K per year starting back in 2010, ceasing the contributions in 2019, and coasting since then. This was held in a fairly diversified (i.e., not very aggressive) portfolio.
Coasting the rest of the way, i.e., without any further contributions, and at 7% return, this should double in 10 years bringing the total time to $1M at 21 years. At 6% it should double in 12, bringing the time required to 23 years.
Positioned more aggressively and/or with the benefit of another bull run, 18 years to $1M is not a huge stretch. At 10% the $500K that took 11 years to accumulate doubles in only 7 more years, in a total time of 18 years. So, it’s doable even if you start late, even while coasting for much of the time.
Hi. I have been curious about the maximum limit of $56K. I thought until recently the gap between $19K and $56K was all (very generous) employer contributions that I would never attain. Now I am thinking I can actually contribute this myself through ‘After-Tax’ 401k contributions?
I currently max out the Roth 401K option (19K). It seems that maybe I should be maxing out the Traditional 401K to reduce taxes and be able to contribute a few thousand more a year to the ‘after-tax’ 401K option. Then once I leave my employer I can do a Roth IRA conversion for this additional portion of 401K money only paying taxes on the gains not the investment.
Is this correct? I have only found a few articles speaking about it and I am not sure I understand completely.
That is correct, but I guess quite rare. Boeing allowed me to do just that. The year before I retired, I transferred the post-tax amounts to an IRA and then immediately converted it to Roth. One former co-worker would make that transaction at the end of each year, and in that way shield most of the gains from taxation as well.
Thanks for the information. I can’t believe it is so hard to find out, it isn’t even spelled out on my company’s benefit site even though the ‘after-tax’ option is there. I guess I should have started to ask questions sooner – but really have only been in a position to max out the (~19K) for the last couple of years. Now I can start to bump it up even more :-).
Hope retirement is super awesome. Can’t wait to be there myself!
Try searching for Mega Backdoor Roth conversion and you’ll probably find more info. I currently do this with my employer. My spouse’s 401k doesn’t allow it.
One other consideration is that there is a bill currently being drafted that would eliminate the option of After Tax 401k contributions. I’m not speculating on what will happen, but if passed as written it would stop After Tax Contributions at the end of 2021.
The downside of After-Tax 401k contributions is that even though you’re contributing after-tax dollars, you still owe taxes on the earnings.
The main value of After-Tax contributions for me would lie in a “Mega Backdoor Roth IRA Conversion.” If your 401k also allows in-service distributions (or you anticipate separating soon) After-Tax contributions become much more appealing to me if you can quickly get them into a Roth IRA.
Yes! You can do this. Indeed, the best case scenario is if your company allows in-plan Roth conversions on after tax 401(k) contributions. This can be automatic (however I had to call my vendor and request it be activated), but basically it immediately makes all my after tax 401(k) contributions and growth as tax free in a Roth. If I leave the company, I would take that money and roll it into my Roth IRA.
One thing to watch out for is at least with my company the way they do the pre tax match (via a true-up) is they automatically stop my pre tax 401(k) contributions at the limit specified by the IRS. However, they do not automatically stop my after tax contributions. So I have to actually calculate the total IRS limit – pre tax – employer match = after tax contributions. I hope this helps. I actually called my payroll representative to understand this and it’s likely different with every company.
I wrote a few posts on this for further reading as I’m a huge proponent:
millennialmusingsonmoney.com/mega-backdoor-roth/
millennialmusingsonmoney.com/401k-after-tax/
My wife and I max out our Roth 401k’s.
-$18,500 for me (going to $19,000).
-$24,500 for my wife (going to $25,000).
I get a 4% Match and she gets a 7% Match.
Is there a maximum amount you can contribute to 401k based on your salary? If I make enough to support my family and my wife makes $25,000, can she contribute 19,000 to her 401k?
Yes, she can contribute $19,000 maximum in 2019 and just live off your income. That’s a smart way to do it. If you can contribute as well that would be great.
There’s no law against it, but some companies choose to cap at a certain percentage of wages. Before I retired, my former employer capped employee contributions at 25% (under age 50). It may also depend on how ‘diversified’ their participation rate is.
I think it’s bad advice to save pretax unless of course you need the reduced tax bill to max out. I am doing a Roth conversion now while taxes are low. It’s not fun coming up with $320,000 to convert. If you have $2,000,000 in a pretax 401K, my financial planner describes you as a lamb going to slaughter. This guy needs to explain that.
The government says thank you for paying a huge tax bill up front!
https://www.financialsamurai.com/disadvantages-of-the-roth-ira-not-all-is-what-it-seems/
Everyone’s tax situation is different. The lower your current tax bracket compared to your expected tax rate in retirement, the more attractive Roth investments get.
But for high earners currently in the top tax bracket, especially if they anticipate some lower-income years later in early retirement, traditional pre-tax investments now with roth conversions later in those low-income years make a lot of sense to me.
“But for high earners currently in the top tax bracket, especially if they anticipate some lower-income years later in early retirement, traditional pre-tax investments now with roth conversions later in those low-income years make a lot of sense to me.”
In early retirement before RMDs kick in is what I hear you saying.
Me too, even though we are not in the top tax bracket. It especially looks attractive if we retire to a state with no state income tax (which we would have already paid without a 401k).
On the other hand. Congress seems more and more determined to limit Roths, to apply RMDs to them, etc. They are also looking for ways to tax us not just on what we made, but on what we might have made. They can certainly change the rules faster than I can implement long-term investment strategies.
Also it seems to me if your tax bracket is pretty low now and will be low later, doesn’t make a huge difference- lets things grow now while also giving you a higher tax refund and lowers your student loan payment if enrolled in an income-based one. There’s not one quick answer for everyone.
Is taking out a 401K loan and repaying back immediately (or within the same year) a loophole in the contribution limit. I’m maxed out of the TSP this year and am looking to take out a loan. To take out $50,000 I would have to pay $2,441 of interest to myself. Minus the $50 loan fee and being post taxed money isn’t the $2,441 of interest contribution beyond the $18,500 limit?
4.89% is a lot less than the earnings you could potentially miss out on. And you would be converting after-tax money back into pre-tax funds and eventually be double taxed on that interest (and its earnings.)
But the even bigger downside to a 401k loan for me is the risk of owing taxes and penalties on it. If I were to separate from my employer and not be able to repay it within like 30 or 60 days it would become an early withdraw.