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 401(k) plan through your employer. First, 401(k) contributions come from pre-tax income, which gives you tax advantages. Then you have the fact that many employers offer match programs. That’s where your employer matches every dollar you contribute with an additional contribution. Finally, you’re able to contribute more to a 401(k) each year than to other retirement accounts. A 401(k) makes it much easier to save as much as you really need to save to retire on time.
But a new 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 last year.
What are maximum 401(k) contributions?
There are federal limits set on how much you can invest in a retirement account each year. Different retirement accounts have different limits and the limits on 401(k) plans are much higher than other retirement accounts. Workers over age 50 are also allowed to make larger contributions, known as “catch-up contributions.” This makes it easier for pre-retirees to get ready for retirement.
- Last year the 401(k) maximum contribution was $18,000 for workers under age 50 and $24,000 for workers over age 50.
- The 401(k) maximum contribution 2018 is $18,500 for workers under age 50 and $24,500 for works over age 50.
- By contrast, the IRA maximum contribution for 2017 and 2018 is $5,000 for workers under age 50 and $6,500 for workers over age 50.
But according to Vanguard’s data, only 13% of workers hit the maximum contribution last year.
Why is it important to max out retirement contributions?
“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 to have in retirement savings if you start maxing out 401(k) contributions by a certain age:
|Age when you start maxing out 401(k) contributions||Amount you’ll have by age 65|
“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 that so few people hit the maximum 401(k) contribution, that could seem like a daunting milestone. If you’re not quite there yet, then a better goal is to first ensure you meet the full amount your company will match.
401(k) match programs are one way that employers incentivize contributions to your 401(k) plan. In order to encourage you to contribute, they agree to match your contributions up to a certain percentage of your annual salary. One common program matches each dollar you contribute with a 50-cent contribution up to 6% of your annual salary.
So, if your gross salary is $50,000 annually, then you should make sure to contribute at least $3,000 each year. If you do, then your company will contribute $1,500 in free cash towards your retirement.
“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.”