The maximum 401k contribution limit for 2023 increases to $22,500, up from $20,500 in 2022, and up from $19,500 in 2021. Your 401k is one of the three legs of the new retirement stool: you, you, and you.
Historically, the 401k contribution limit usually increases by only $500 every two to three years. However, thanks to inflation, the contribution limit has increased by $2,000 versus last year.
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 $7,500 extra per year from $6,500. 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 2023 is $43,500. This brings the total maximum 401k contribution between employee and employer to an impressive $66,000 for 2023.
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 $22,500, and multiply it by one minus your effective tax rate to calculate your disposable income e.g. $100,000 – $22,500 = $78,500 X (1-25%) = $58,875 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.
X-Ray Your 401k For Excessive Fees
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I ran my 401k through it 401k Fee Analyze and found out I was paying $1,748 a year in portfolio fees I had no idea I was hemorrhaging. As a result, I switched my funds to low-cost Vanguard funds with similar strategies. Since the switch, I’ve saved over $14,000 in fees.
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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.
Financial Samurai says
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.
Red Dargon says
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.
Paul Lutes says
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.
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.
Paul Lutes says
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.
Alex Hamilton says
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:
Chris S says
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?
Financial Samurai says
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.
Financial Samurai says
The government says thank you for paying a huge tax bill up front!
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.
I’ve contributed 18K to the pretax this year, now I am planning to contribute to few bucks to Roth 401k. My age is 29 years old. I started my pretax 401(k) last year and so far I could save only $25000 all together in pretax
Now, I would like to contribute after-tax dollars to Roth 401k. How much more can I save to avoid tax penalty for the Roth 401K.. I know that we cannot use the money till it completes 5 years. Any suggestions over here.
Check with your employer. I found that my former employer has the same limits on Roth 401k as a regular 401k, so you can’t double dip that way. My former employer still allows post-tax contributions to the 401k, they just don’t go into a Roth. It’s up to the employee to roll them over to a Roth IRA either at the end of each year or when you retire.
Yep, traditional and Roth 401k contributions share the same limit.
An IRA would be the simplest option after that but if your 401k plan allows After-Tax contributions & In-Service distributions, look up “Mega Backdoor Roth Conversions.”
Also do you have an HSA? If you have relatively high qualified medical expenses, consider maxing it out, paying your expenses out of pocket, and saving your receipts until retirement. HSA’s have the best tax treatment of any plan (when used for QME) but worst-case you can treat it like a second traditional IRA.
Michael Henry says
I am 66 and am currently trying to max out my 401K (to it’s federal limit of $60K). I am contributing $18K from salary + $6K from salary for catch-up. My employer matches up to $6800 of salary + an extra $11K because pension system is being terminated. That adds up to approximately $42K. The Federal limit is $60K. How do I get the extra $18K ($60K – $42K) into the 401K, or other tax deferred account?
Financial Samurai says
That portion is up to your employer. If they don’t give it to you, then there’s nothing you can do. You can always ask!
Does your employer allow additional contributions on an after-tax basis? Mine did, and that’s how I hit the maxes the last few years of my employment.
If they allow After-Tax contributions, that’s the answer. But the earnings on your after-tax contributions will be taxable if you leave them in your 401k.
The after-tax contributions become much more attractive if you plan allows in-service distributions and you are able to roll them into a Roth IRA. Google “Mega Backdoor Roth Conversion” and double check to make sure your 401k is compatible. Also double check the total 401k limit.
This is a great article and i love reading the comments for the education. As a public sector employee in local government in NY we have access to both a 457 and 401k and I max both each year. Being over 50 this allows for a 48,000 contribution (of course no match). I will have a pension as well so i now start to question…as others have…..does it make sense to maximize both plans? Thoughts?
I think it makes sense to maximize both, but that’s from my frame of reference. I just retired at 55. I have a pension (discounted due to early retirement) and I spent the last 20 years contributing “the max” to my 401K. Since my company allowed for post-tax contributions (in addition to pre-tax), my final contributions were in excess of $50K a year.
You have to do some basic math to “check yourself” on whether you’re contributing too much. For me, I wanted to maintain roughly the same income stream in retirement – taking into account that I wouldn’t be making contributions anymore of course. I use a 4% withdrawal rate in my calculations, as I feel a properly diversified low fee portfolio can return that in perpetuity. So, $1M saved = $40K / year forever.
If you’re contributing so much that you’ll have way more income in retirement than you do now, that would be a good indicator to slow down. Otherwise…
Thanks so much for the information. I will probably have significantly more in retirement due to the taxation treatments of my pension and that I will be relocating to a lower tax state.
By the way i am jealous of you – the plan is to retire sometime in the next 2-4 years but of course i want to now haha
H Milewski says
I realized I did not max out my 401K at $18K, so can I send in after-tax funds from my personal savings account to my 401K account that would then reduce my tax liability on my tax returns for the year (and in effect result in $18K pre-tax investment)? or have I entirely missed the opportunity to max out my 401K this year?
Financial Samurai says
You still have time to contribute! Deadline is Dec 31, and you presumably have another paycheck for the month? See if you can contribute 100% of it to your 401k at least.
Daniel Novick says
Great post, I just have a couple of questions:
What are your thoughts on regular 401k vs Roth 401k? It seems that for me I will likely move up in tax rate by the time I’m retiring, however the difference I’ve calculated (for current tax rates) seems negligible in the bigger picture. The one advantage I see for the regular at this point is that I can save to the max with it being a smaller portion of my gross income. Just wondering what your opinion is.
Second, I’m interested to find out how you plan on reducing risk as you get closer to retirement age. For example my employer offers 5 funds, and I have my 401k fully allocated to a schwab index with the lowest fees. However, because it’s tied to the market what options do we have to reduce that risk (i.e. moving into bonds, etc.) as we get closer to retirement. Worst case scenario being we have a substantial nest egg, and right as we retire , a significant economic downturn occurs, reducing the value of the investments.
Thanks for the great resource, look forward to continue to follow your site.
Mark Gerardy says
Today at age 47, I am within a few percentages from making the maximum contributions to my 401k and Roth IRA. Next year, I plan to make maximum contributions.
HOWEVER let me tell you a story: I graduated with my degree in Accounting in 1990, during the height of a recession, and the best job I could find at Norwest Bank paid me $14,100 per year.
If I had contributed the maximum 18% that my employer allowed and maxed out contributions to a Roth IRA, I would have been living on $216.12 per month. It was already a struggle to live in Denver on $822.00 per month, net. I did the best that I could and once things go better (earning in the high teens) I contributed 6% which was the max my employer matched.
This year I should earn around $103,000 – $115,000 per year. However, I have deep resentments of anyone harping on young people to save such audacious amounts. It is absolutely ridiculous to think that almost any young person is going to be able to save $18,000 per year. Are they supposed to live in a homeless shelter?
I know all about compounding interest. I remember many well-intentioned adults, who were living in their own wealth & income bubble, preaching to me about “maxing out my 401k contributions”. This is when I could not afford to barely eat. No, I was not taking trips to Aruba or buying lattes. I was starving and had not taken any actual vacations for nearly a decade.
In a perfect world, college graduates would ALL start out earning $50,000, and then be willing to live in the ghetto in order to make maximum contribution to their 401k. But these unrealistic idealistic goals that are preached to the poor 20-something who is earning $20,000 is only going to discourage him or her into being resentful and scorn those who make such presumptions. When I was earning $822.00 per month, some financial advisor told me that if I could only set aside $200.00 per month… I was furious. After rent, utilities and food – I had about $20.00 left over every month.
This lofty advise rubbed me the wrong way and for many years, I contributed less than I could have out of pure resentment. Sure, I may have hurt myself, but I also got myself into a nice home in a safe neighborhood with a reliable car and established as a professional.
So before anyone goes preaching about contributing $18,000 to ones 401k at age 23, please consider that the person earns first and then take the time to do the math and be realistic. It does not make any sense if a person has to live as destitute to make such outrageous goals. There is a difference between living with dignity and a full stomach versus buying a brand new car and taking international vacations in your 20s at the neglect of a 401k – and it starts with actual earnings to be able to fund such realistic or unrealistic 401k goals in the first place.
Please stop with the presumptions when it comes to young people. It is often wildly-unrealistic to even think that a young person will earn enough by age 30, or even age 40, before they can begin to make maximum contributions to their 401k. Such expectations or even suggestions can easily have the opposite effect and turn young people off to saving anything at all.
Financial Samurai says
Check out the title of my post. It says what you COULD have if you max out your 401k every year of you start now.
I understand the world is not perfect. My chart provides a guide, and perhaps some motivation of you choose to take it the right way. But I’ve noticed some people choose to take the pessimistic or angry point of view. And that is a reflection of one’s disposition towards life.
I’m a super optimistic. Sprain my ankle, thank goodness I didn’t break my ankle.
Cash Cow Herder says
First of all thanks for writing your great website; it’s part of what’s inspired me to start my own blog. We have a much higher limit in the UK (£40k / $60k) which would clean me out if I tried to match it. I guess I could match the US limit and raise it when I can afford to, or am I just not being brave enough? The other option I have is just put enough in to take me out of the painfully high 40% income tax bracket (which is pretty much what I’m heading towards, gradually increasing from just meeting the company match). Hopefully I’ll earn enough (or get good enough at saving) to meet the limit later.
Financial Samurai says
That’s great you guys have such a high limit! I would always try to max out until you can’t stand the pain anymore. Make it a game and live within your lower means. Your 10 year older self will thank you for the tremendous safety net you’ll provide!
Cash Cow Herder says
Well yes and no on the high limit – we also have a lifetime limit of £1.25m (which they’re threatening to drop to £1m) on the pot size NOT the contributions, so if you put too much too early into your pension your interest could take you past the limit (even if you stop contributions) and you can get taxed on the excess at 55%! I’d actually much rather have no lifetime limit and a lower contribution limit.
Makes it trickier as if you’re going to invest well and earn lots later it makes sense to lower your contributions to avoid hitting the limit (which leads to lots of extra taxes and potentially missing out on company match), but if you’re going to earn little later it makes sense to put in loads now as with NI most professionals have a 42% income tax rate (which is usually then 20% in retirement when you’re drawing your pension). You basically have to be able to correctly guess whether you’re going to be being paid well in 20 years time.
Good stuff here. I have a couple points / observations to make:
Catch up contributions can start in “the year you turn 50”, not after you’re 50. A small point, but I have a December birthday, so that’s a whole year of enhanced contributions I would have missed.
As some other commenters have noted, the total ‘max’ contribution to 401k in 2015 is $53k, $59K if you’re making catch up (50+) contributions. I’m doing this, aided by a 6% company match. I am of course blessed with a high earning job (engineering manager) and I’m late in my career. To the point of this blog, I didn’t wake up one day in my 50’s and go, ‘Hey, I can afford to shovel 25-30% of my income into my 401k!’ – I started with ‘capturing the match’ as a young engineer, and progressed to ‘maxing out my contribution’ by putting half of each raise into increased contributions until I hit the company imposed limit.
Post-tax contributions to a 401k can be rolled over into a Roth IRA (yearly, if your plan allows), so this is another way to ‘juice’ your IRA contributions.
As large established companies unwind their pension obligations, we will see ‘company match’ percentages go up on 401k contributions, with first year bumps of 9% (over and above the match and employee contribution) not unheard of. I worry that the younger cohort sees this and thinks, ‘No problem, *I* don’t have to bump my contribution up, because I’ll hit the 18K max anyway.’ Without a pension, they need to think bigger. $52K is the new $18K.
Carla West says
Thanks for another informative post! I was wondering about your opinion on annuities. I recently read a book called ‘The Annuity Stanifesto’ by Stan Haithcock. It got me really motivated and excited about the possibilities of how to fit annuities into my portfolio. The topic can be confusing and intimidating at times, so hearing about different strategies (like leveraging, laddering and splitting contracts) was refreshing. Check out his website (www.stantheannuityman.com) and let me know what you think!
Financial Samurai says
Annuities tend to be great for those selling annuities due to the fat spread. But buying annuities now is tough given interest rates are so low.
My bias is towards keeping your principal and keeping liquid.
I have a SIMPLE-IRA at my workplace. Unfortunately, the plan is held with Edward Jones, all high expense ratio funds. My current fund has no front load but on expense ratio of 1.43%!! I currently just contribute to the max match (3%) and invest the rest elsewhere. I have a hard time putting money in an account that is going to take so much in fees when say Vanguard funds exist that have an expense ratio of 0.05%
I have been looking into the possibility of trustee-to-trustee transfers to contribute the max then immediately transfer the money every month to say Vanguard. Keep only $100 or so at Edward Jones at any given time. I’m sure this would tick the adviser off like no other, but seems to be my only option if I want to avoid the fees and contribute the max.
Still trying to decide what is best… thoughts?
UPDATE (from the last 2 days):
I asked my Edward Jones financial adviser if he could offer me any no-load, low expense ratio funds, I told him for example I invest in vanguard funds in my other accounts.
His response: I think it’s best if you open a SIMPLE with Vanguard and transfer your money there!! I was surprised he didn’t even try to keep my business (although as of now I’m a “small fish”)
Given my employment situation I am able to start a SIMPLE at vanguard! Good bye EJ!!
Financial Samurai says
Very cool to know!
Maybe ask him/her these questions before cutting the chord:
I’m almost 34 years old and have about $80k in my 401k. By looking at the graph, I’m well below the 401k curve for my age. Would you guys recommend maxing out my 401k and also contributing the maximum to a roth at my age and current state of amount invested? Thanks!!
I contribute only enough to get the match. I’m not as convinced aas others that 401ks are a great deal. Income tax rates are historically low. By deferring tax payment on that income, you are essentially gambling that taxes will be similar or lower in the future. Given the state of the debt and the fact that multiple entitlement programs are grossly underfunded, I’ll withdraw my money at tax rates I know are low and make investmentsure post-tax.
God bless tax-deferred accounts!
Sam, I have been thinking about changing my Roth 401k to a traditional 401k. I am sick of being taxed at 35% or more because I put in 80-90 hours a week in the summer months. This might be a good way to shelter that money, right? I would probably bump my contributions up to 50% for 6 months then back down to 5 or 10% for the winter months when I work 45 hrs/ week. A lot of my coworkers don’t like working overtime anymore because you get such a little return on the extra hours (but 1.5X Pay) when OT gets taxed like crazy. Your thoughts?
Typically companies will pull out more taxes on bonuses and overtime than they do for your normal working hours, but at the end of the year it’s all the same. I would suggest adjusting your withholding exemptions and try to zero out your end of year taxes. Then you don’t really need to worry about what your individual paychecks look like, it’s all the same at the end of the year.
I’m still paying off my student loans so I don’t max out the 401k yet. My company doesn’t offer great choices and the fees are high if you use their brokerage account. I feel like I could find better investment options outside the 401k.
does your chart include putting in extra money once you turn 55 years old? I think the limit is $23k?