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
Sign up with Personal Capital and analyze your 401k for excessive fees. They are a free online platform which aggregates all your financial accounts in one place. This way, you can see where you can optimize your money.
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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