Only 13% of workers max out their 401(k) contributions, but more of us should be.
When it comes to retirement savings, few accounts offer the advantages of a retirement plan offered through your employer. Many of these accounts offer tax advantages and many employers offer will also contribute to employee funds which makes it much easier to save as much as you need to save to retire on time.
A study from the retirement experts at Vanguard finds that most people aren’t using their 401(k)s to the fullest advantage. In fact, only 13% of workers maxed out their 401(k) contributions in 2017.
What are maximum 401(k) contributions?
There are federal limits on how much you can contribute to a retirement account each year. The amounts vary based on two key things:
- The type of retirement account (e.g. 401(k) plans are much higher than other retirement accounts)
- Age. Workers over age 50 are also allowed to make larger contributions, known as “catch-up contributions” that make it easier for pre-retirees to prepare for retirement.
The 2024 maximum 401(k) contributions is $23,000 for workers under age 50 and $30,500 for those over 50. The maximum contribution for Individual Retirement Accounts (IRAs) is $6,000 for workers under age 50 and an additional $1,000 for individuals over 50, for a total of $7,000.
Why is it important to max out retirement contributions?
According to Vanguard’s data, only 13% of workers hit the maximum contribution last year, leaving a lot of money on the metaphorical table.
“The more money you save each year for retirement, the better prepared you’ll be once you reach retirement age,” says Gary Herman, President of Consolidated Credit. “Maxing out your 401(k) contributions early on in life helps ensure you have the funds you need at age 65.”
The writer of the NWITimes article did the math about how much money you can expect in retirement savings if you start maxing out 401(k) contributions by a certain age.
| If you make maximum 401(k) contributions at age… | You’ll have ___ by age 65 |
|---|---|
| 25 | $3.8 million |
| 30 | $2.7 million |
| 35 | $1.9 million |
| 45 | $1.3 million |
| 50 | $616,000 |
| 55 | $338,000 |
“Maxing out 401(k) contributions means you’ll have more money available once you retire,” Herman explains. “You’ll have less dependence on uncertain sources of retirement income, such as Social Security benefits.”
If you can’t max out, at least hit your company’s match
Given the cost of living in 2024, with housing, vehicles, food, and college degrees continuously becoming more expensive, hitting the maximum contribution can seem out of reach. A more feasible, but still highly beneficial goal, is to ensure you meet the full amount your company will match at the very least.
Employer matching is one of the greatest benefits of enrolling in your company’s retirement plan. It’s when your employer contributes a certain amount of money towards your contributions based on the amount you contribute as an individual — essentially free money! There are limits, however. Employer matches are often capped at a specific percentage of your annual salary. For example, an employer with a 3% match program will contribute up to 3% of your salary towards your retirement if you contribute at least 3% yourself. Failing to enroll in your employer’s retirement plan, you won’t see a dime of retirement money regardless of your employer’s match policy.
The most common employer contribution arrangement is a partial match. Instead of matching retirement contributions dollar-for-dollar, employers with a partial match contribute 50 cents for every dollar their employee contributes. A maximum contribution percentage can still apply. Example: a 50% partial match with a 6% cap means that an employer will contribute half as much as their worker contributes up to a maximum of 6% of their annual salary, effectively contributing 3% towards their retirement fund.
“Making sure you meet your company’s maximum match amount is a good first step if you’re trying to ramp up your retirement savings,” Herman encourages. “Then you can slowly increase your contributions each year until you hit the maximum 401(k) contribution limit.”
“Negotiate a higher matching contribution to your 401(k).”
amanda grossman, frugal confessions
Webinar On Demand
The Gen X Retirement Guide
Make a practical, achievable plan for your retirement, even if you’re already over age 50
As the newest Sandwich Generation, Gen X consumers struggle to save effectively for their own retirement. This guide teaches you how to save for your golden years, even if you’re already over age 50.
Runtime: 8:48
If too much credit card debt is stopping you from saving for retirement, we can help. Talk to a certified credit counselor today to find the solution you need.
