I'm quite fortunate in that my company is on an annual raise and bonus cycle, which kicks in on January 1st. Every year before the winter holidays, I start preparing for next year's financial plans and goals. That means evaluating my savings goals, one of which is maxing out my 401(k).
In searching for the new limits, the first thing that pulled up was "Should You Even Try to Max Out Your 401(k) in 2023?" The bait worked. I clicked.The argument made was that with the 401(k) limits increasing next year to $22,500 up from $20,500, it's just a lot of money and you won't be able to spend it any time soon. Isn't that the point? That you're saving for future you?
The first piece I want to acknowledge is Yes, it is a lot of money. Maybe it's your rent for a year, a new car, or a ton of trips. That doesn't mean it isn't worth trying. Even if you try and fail, you will still be better off.
Why Aim to Max Out?
1. If it's your goal, it's extremely self-defeatist to give up!
This is the most important reason to keep going. Good things aren't always easy things. There are always good days and bad days for working toward your goals, and sometimes it's two steps forward and ten steps back. Life happens and it can feel like failure, but if you keep going, you haven't failed. If you give up, that is the failure. (Not to be confused with changing priorities!)
2. Tax advantages, tax advantages, and more tax advantages.
Traditional 401(k)s allow you to reduce your taxable income in the current year. If you are in the 22% marginal tax bracket, you'd pay $4,950 on the $22,500 and actually only take home $17,550 of it. Instead, you've now put $22,500 to work for you in the market. If you get an employer match, that's even more money going to work for you. Then, when it's time to pull it out, you can be strategic about how you access your accounts to minimize your tax burden. Our CPA helps us with our tax strategies. I am also still contributing to my Roth IRA, which offers tax-free withdrawals, extremely useful for a year where I may need to withdraw a lump sum.
3. Out of sight, out of mind.
If you don't see the dollars hit your bank account, it doesn't hurt to save it. There's no opportunity to say "I would rather use it for something else." With the 401(k)s, you just don't see it unless you actively check your paystubs and investments. I really don't recommend dwelling on it, though.
They're financial, obviously. You have the opportunity to turn that $22,500 into a million if you leave it alone for long enough. The stock market has a very long history of going up over time.
- Initial Deposit in 2023: $22,500
- Assumptions: No more money is added. It just sits there for years, growing 8%** each year. (**This is a standard historical assumption.)
- In five years, you will have $33k.
- In ten years, you will have $48k.
- In fifteen years, you will have $71k.
- In twenty years, you will have $104k.
- In twenty-five years, you will have $154k.
- In thirty years, you will have $226k.
- In forty years, you will have $488k.
- In fifty years, you will hit a million.
Strategies to Increase Your 401(k) Savings
Just do it! It's good for you. At least in the long term, according to history.
My favorite trick is forcing myself to tough it out. I don't budget, and this method just works well for me. If I want to hit an amount, I change the amount of money that goes into my spending account by automatically redirecting it elsewhere. I then adjust my spending accordingly based on the dollars left in my spending account. If it really was too much to cut (I give it a month or two), I will dial it back partially (life isn't meant to be miserable!), but almost every time, I've been able to make it work.
Choose a regular cycle for increase and stick with it. Many 401(k) plans allow you to automatically bump up your contribution rates annually so you don't even have to think about it.
Always be realistic and set reasonable goals for yourself. If you only make $20k, you aren't going to be saving $20k. One of your goals could be something you want to do to increase your income for the coming year with a plan to tuck those savings aside.
I have faith in you.