One of the best ways to save for retirement is to use tax-advantaged accounts. Most employers offer the option of contributing to a 401(k) account, which can be a great idea for stashing cash for your golden years.
Maxing out your 401(k) account for a few years can give you a good foundation for retirement. The earlier you get started, the longer the money will have to grow and earn interest.
While it may seem difficult to put so much money away, below are several tips to help you fill up your retirement accounts.
What Does It Mean to Max Out My 401(k)?
The maximum you can contribute to a 401(k) account in 2019 is $19,000. If you’re age 50 or older, you are allowed a catch-up contribution of $6,000 for a total of $25,000. The IRS reviews these numbers every year and adjusts them for inflation, as necessary.
Keep in mind that the $19,000 maximum doesn’t include any employer matching or other employer contributions. If your employer offers a match, you can end up having more than the $19,000 (or $25,000 if age 50 or older) in your account.
The maximum applies for both traditional and Roth 401(k) accounts..
Does It Make Sense to Max Out My 401(k)?
If you’re considering maxing out your 401(k) account, you need to ensure it makes sense for your particular situation. How much you should put away toward retirement depends on a number of factors:
- Salary - Not everyone can afford to contribute $19,000 a year to a retirement account. If your salary is on the lower end of the spectrum, that’s a big chunk of money. For example, if you make $50,000 per year, the 401(k) maximum represents 38 percent of your salary.
- Emergency fund - You should adequately fund your emergency fund before stashing extra money away for retirement. It’s best to have three to six months of expenses saved for emergencies before considering putting anything extra toward your 401(k). An unexpected event such as a car accident or a health problem can cost you more than you think so make sure you’re covered.
- High-interest debt - Pay off high-interest debt such as credit cards before maxing out your 401(k). High-interest debt will cost you more in the long run than any gains you may earn by putting the money in the stock market instead. Review your personal loans, auto loans, and student debt. Do they have high-interest rates? If they do, make a plan to pay them off first before supercharging your retirement savings.
- Short-term goals - If you have a big financial goal on the horizon such as buying a house or having a baby, hold off on maxing out your retirement accounts. Create a saving strategy that allows you to meet your short-term goals before putting extra money toward your retirement. Talk to a qualified financial advisor who can help you create a financial blueprint to help you align your goals and values with your spending.
Tips for Maxing Out Your 401(k) Account
If your emergency account is fully funded, your debt is paid and you have a plan in place to save for big expenses, you can focus on beefing up your retirement contributions. You can start off by slowly increasing your contributions or make a plan to max out the full $19,000.
The tips below will help you make the most of your contributions.
Automate Your Contributions
Don’t rely on your memory or your self-control to contribute to your retirement account. If you want to be successful in putting money away in your 401(k) account, you need to remove yourself from the equation.
This is where putting your contributions on autopilot can help you reach your goals. Talk to your Human Resources department about your options for contributing and increasing your contributions to your company’s 401(k) account.
Sign up for automatic deductions and automatic increases and watch the money in your 401(k) grow over time.
Go Slow
While you may be tempted to go all in on maxing out your 401(k) account, proceed with caution. Contributing $19,000 in a year to your retirement account comes out to $1,583 every month; if you’re over the age of 50, it’ll take $2,083 a month to max out your paycheck.
It can be a difficult adjustment to have such a large chunk of money taken from your paycheck. First, consider if it makes sense to max out your 401(k) on your salary. If you think you will be able to swing it, start by having 10 or 15 percent taken out of your paycheck.
Increase your contributions over time. For example, consider upping the amount by 1 or 2 percent every six months. Some retirement plans even offer the option to do this automatically, increasing the amount every year by a set percentage.
Another option is to increase your contribution for the next three pay periods and see how it works with the rest of your budget. If you don’t feel the pain, increase it again, and repeat until you’ve hit the maximum.
You can also time your increases with your annual salary increases and your bonus. This will make it less painful since you will still get a bump in pay, albeit a little smaller. Do this with every pay increase and bonus and you will be well on your way to maxing out your 401(k) account.
You may be surprised how going slow can make the process less painful. As your take-home pay shrinks with each bump in retirement contributions, adjust your spending accordingly.
Take Advantage of Your Company Match
If your employer offers to match your retirement contribution, make sure you’re contributing enough to take advantage of this perk. For example, your employer may offer to match dollar for dollar your 401(k) contribution up to a certain amount.
This is free money and can help you toward maxing out your 401(k) account. While your employer’s contribution won’t count toward the maximum you can contribute, you can use it to boost your savings.
If you make $75,000 per year and your company offers to match your contribution dollar for dollar up to the first 5 percent of your salary, that’s an extra $3,750 in free money. It will continue to grow in your account for years to come, making this deal even sweeter.
In the above example, if your goal is to max out your 401(k) to $19,000, this means contributing 25 percent of your $75,000 salary. However, with the employer match, you now only have to contribute 20 percent if you want to get to $19k.
Stay the Course
One of the harder things when maxing out your 401(k) is dealing with the smaller paycheck. You may be tempted to reduce your contributions, so you have more money coming in every pay period.
If you already have an emergency fund in place, no high-interest debt, and a plan to save up for big goals, the best thing you can do is stay the course. If your take-home pay is enough to cover your monthly budget, just keep chugging along.
Remind yourself of the tax-break you’ll enjoy on your savings. Your investments have the chance to grow tax-free inside your 401(k), supercharging your retirement income. It can be a great way to reduce your tax liability for the current tax year. =
Remind yourself that you’re saving for the long term and ignore the ups and downs of the stock market. People tend to panic when the stock market takes a tumble. Resist the urge to take your money out of stocks and put it in safer options such as bonds or a money market account.
The average annual return for the S&P 500 is 10 percent. However, to see a good return on your investments, you need to practice a hands-off approach to investing. Continue contributing money to your 401(k) account, set up automatic rebalancing, and leave it alone.
This can be easier said than done but it’s one of the keys to having enough funds to sustain you through your golden years.
Make Catch-Up Contributions
If you’re age 50 or older, you have the option to make a catch-up contribution of $6,000 toward your retirement account for a total of $25,000 annually. This can be a great way to boost your savings if you’re behind on funding your 401(k) account.
As you advance in your career, you should experience a corresponding increase in compensation. By age 50, you will reach your highest earning years. According to CNBC, a study by PayScale found that full-time workers with Bachelor’s degrees make the most money in their 40s and 50s.
This can make your early 50s a good time to catch up on your retirement contributions. Putting an extra $6,000 on top of the maximum $19,000 annual contribution will put you in a good place financially come retirement.
Make sure you have the rest of your finances in order before putting such a large chunk of money in your company’s 401(k) account. If you have kids who will be going to college soon or other financial obligations, ensure you have a savings plan in place.
When Shouldn't You Max Out Your 401(k)?
While maxing out your 401(k) seems like a good idea, this is not always the case. Even if you have a solid emergency fund, no debt, and a savings plan for big expenses in place, you may want to reconsider.
Sometimes it doesn’t make sense to put all of your retirement money in your company’s 401(k) plan. First and foremost, contribute enough to your company’s 401(k) account to get the full employer match.
Keep in mind that most employer matching programs come with a few strings attached. For example, many employers tie a vesting schedule to the 401(k) match. It requires employees to work at the company for a certain number of years before being able to keep the full match.
In addition, consider the type of investments available within your company’s 401(k) account. Fees can eat away at your retirement savings, costing you thousands of dollars in earnings over the long term.
While it may make sense to contribute enough to receive the full company match, think twice before putting more away in your company’s plan. Review the fees you’re getting charged for your account and research other options.
If you’re not sure how the fees you’re getting charged stack up, check out NerdWallet’s 401(k) fee analyzer. Some of the fees you may be paying without realizing include brokerage account fees, trade commissions, mutual fund transaction fees, expense ratios, 401(k) administrative fees, and much more.
Instead of using a high-fee 401(k) account (if your 401(k) falls under that category), consider other options such as a traditional or a Roth IRA. The contribution limits for 2019 are $6,000 and $7,000 if age 50 or older. This can make it easier to max out your retirement accounts.
The Bottom Line
Maxing out your 401(k) account requires a sufficient amount of income, dedication, and a solid plan. Since it takes $19,000 (or $25,000 if age 50 or older) to max out your employer-sponsored retirement account, make sure you have a solid plan for the rest of your finances.
Start off slowly and up your contributions over time for a painless way to increase your retirement savings. Talk to a qualified financial advisor to figure out if it makes sense to max out your retirement accounts.
This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at the website NextGen Wealth.