Maxing out a 401(k) is a tall order, but it’s not necessary for me to enjoy a comfortable future.
Maxing out your 401(k) is one of the most rewarding retirement planning moves you can make. It involves setting aside a whopping $23,000 today ($30,500 if you’re 50+). That could grow to be worth hundreds of thousands of dollars by the time you need to withdraw it.
But saving that much cash today isn’t easy, and it’s a feat I never managed in all the time I had a 401(k). Now, as a self-employed worker, I save in a SEP IRA, and I still haven’t yet managed to set aside $23,000 in a single year. But that doesn’t worry me, and you shouldn’t be worried either if you haven’t pulled this off.
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Maxing out your 401(k) is great, but not necessary
Maxing out your 401(k) is a great retirement savings move if you have the spare cash and don’t plan to spend it on anything else. But it’s definitely not a requirement for most people. Unless you plan to maintain a lavish lifestyle in retirement, you can save enough without ever coming close to the 401(k)’s annual contribution limit.
Let’s say you think you’ll need to save about $1.5 million to cover your retirement costs. You could get there in less than 24 years if you consistently contributed $23,000 to your 401(k) — about $1,917 per month — and earned an 8% average annual return on your funds. But if you started earlier, you could also reach that amount by saving just $464 monthly over 40 years, assuming the same 8% average annual return.
The latter option is a lot more doable for most people. Yes, it takes longer, which means you’ll have less time to enjoy your money. But it also leaves you with more money you can spend on expenses or discretionary purchases throughout your career.
I prefer to aim for a contribution amount that’s comfortable for me but still makes retirement savings a top priority. I try to set aside at least 15% of my annual income each year. As long as I’m doing that, I feel pretty confident that I’m on track.
I also still have decades left in the workforce before I can even think about retiring, so that gives me plenty of time to adapt my strategy as necessary. I also hope that my income will continue to rise, which may enable me to set aside even more money in future years.
How to plan your 401(k) contributions
Rather than aiming to max out your 401(k), set a target percentage of your income or a dollar value you want to save based on your personal retirement savings goal. Use this as your guide.
Keep in mind that if you get an employer match, you won’t have to save all this money on your own. If you decide you need to save 15% of your income annually, for example, and your employer match is 5% of your income, then you’d only need to set aside 10% on your own.
Stay mindful of your vesting schedule if you haven’t been at the job long and are thinking about leaving. This determines when you’re eligible to keep your employer-matched funds if you leave your employer. In some cases, you must work for the employer a full six years before you’re allowed to keep all the matching contributions you’ve earned. If you plan to leave before you’re fully vested, you may want to increase your personal contributions accordingly.
Finally, stay aware of the annual contribution limits. We’ve already touched on the 2024 limits, but these will likely rise in future years. You’ll also become eligible for catch-up contributions in the year you turn 50. These can be helpful if you weren’t able to contribute as much as you would’ve liked when you were younger.
Take some time to reevaluate your 401(k) contribution rate at least annually, or whenever you experience a change to your financial circumstances, like a raise. Make whatever changes are appropriate to ensure you have the cash you need today while doing your best to stay on track for your long-term goals.