piggy-bank-blog

Saving $18,000 in 2017 – 4 tips to max out your 401k

January 3, 2017 in Financial Planning by

No matter how much you might make, $18,000 is generally considered a good chunk of change. It’s the cost of a 2016 Chevrolet Sonic. For some, it’s the price tag on a first-class luxury vacation. It’s also the maximum amount you can contribute to your 401k this year (if you are under 50 years old).

We’ve all heard the sage advice to “max out your 401(k)” whenever you can, since the earlier you start doing this, the earlier you start reaping the benefits of tax breaks and compounding interest over time. But while everyone’s situation is different in terms of salaries, family situations, or employer matching programs, saving $18,000 per year boils down to $1,500 per month. That’s $750 per paycheck, if you’re paid twice a month. (Note: employer contributions do not count toward this number.) It’s doable, but it’s a hefty sum if you haven’t honestly worked it into your monthly budget.

[See if you’re on track to reaching your retirement goals with our free Retirement Planner]

Here are four things to keep in mind if you’re trying to max out your 401(k) contributions this year:

1. Take stock of monthly payments. For some of us, tucking away $18,000 seems easy in the grand scheme of things. However, don’t forget about the other expenses you have to prioritize. Imagine, for example, that you make $150,000 per year. After taxes, let’s estimate that your take-home pay is around $90,000 per year, approximately $7,500 per month. That’s nothing to sneeze at, but you also have a mortgage or rent payment to think about. The national average monthly mortgage at that income level is around $1,700. Now you’re down to $5,800 per month. Think about any debt you’re trying to pay down. According to Student Loan Hero, the average monthly student loan payment is $351 (though you may want to think strategically about rushing to pay off that loan). The average American has $4,720 in credit card debt. Then there are other expenses — groceries, utilities, car payments, kid-related expenses, and other investments. Finally, factor in a $1,500 contribution to your 401k. Even though that contribution is pre-tax, your take-home pay may decrease faster than you realize, so it’s important to take a comprehensive look at your finances to understand what maxing out your 401k will look like on a month-to-month basis.

2. Calculate what you are paying in fees. You could be paying hundreds of thousands of dollars over a lifetime in hidden fees in your mutual fund, investing and retirement accounts. This means you think you’re saving all of your hard earned money, but you’re actually losing a portion of your savings without even realizing it, just adding years onto your working life before you can retire. By using our fee calculator, you can determine just how much you’re paying in hidden fees and, the impact to your portfolio over time. This will arm you with the information you need to change and optimize your investment strategy to maximize returns, which ultimately could be extra cash you can put toward your 401k.

3. Be strategic about big ticket expenses. Are you planning a huge blowout vacation? What about a second home? Even though these are “right now” purchases, they should be thought about in the framework of how they’ll impact you long-term, especially if you’re looking to max out your 401k contributions. Can you make your vacation into a 2-year plan, giving you more time to save up some cash, or use points-based rewards to upgrade your travel? Or are you thinking about the right things when it comes to purchasing that vacation home by assessing what your goals are in making this purchase and how best to leverage financing and tax options. Big purchases are meant to give us joy, and hey, you’ve earned them. But thinking about them long-term in context of planning for retirement will go a long way when trying to hit that $18,000 annual amount.

4. Take advantage of your employer contribution plans. An employer matching your contributions is basically like getting free money to sock away toward retirement. Make sure you understand what plan your employer offers and what that means for you. Most often, employers will match a percentage of your contributions – generally within 3% to 6% of your annual pay – although sometimes they will choose to match your contributions up to a specific amount. If your employer doesn’t match, see what it would take to negotiate that into your compensation package.

While $18,000 is large number to save considering all the other expenses you have in your life, with a little bit of strategic planning and adjustments, you should be able to work this into your financial strategy in 2017 – and beyond.

The following two tabs change content below.
Personal Capital

Personal Capital

Better financial lives through technology and people.

6 comments

  1. Andrew

    This article incorrectly suggests that the amount your employer matches towards your 401k counts towards the $18,000 yearly contribution limit. It does not; in 2015, the combined contribution limit per year was $53,000. The fact of the matter is that every person who is seriouse about his or her savings should sock away the IRS allowable maximum to their 401k every year from their paycheck alone.

    Reply
    • Jennifer Kincaid

      Agreed! Updated to reflect the correct employer contribution info. Thanks!

      Reply
  2. Mike

    I don’t believe the line “(Of course, if your employer matches your contributions, then you won’t need to cover this full amount yourself.)” makes sense. The $18,000 limit doesn’t include employee contributions, so maxing out a 401k would require $750 on a bi-weekly basis.

    Reply
    • Jennifer Kincaid

      You’re right, this has been updated. Thanks!

      Reply
  3. Paul Gessler

    “Of course, if your employer matches your contributions, then you won’t need to cover this full amount yourself.”

    While it’s correct that you don’t “need” to cover the full $18,000 yourself, that’s only true in the sense that nobody “needs” to max out their 401k each year. Employer matching and/or nonelective contributions are separate from the $18,000 employee elective deferral limit. So in most cases, employees could contribute the full $18,000 in addition to any matching or employer contributions. There are limits that apply to the combined contributions (employee and employer), but many people will not encounter these limits: For 2017, the annual additions paid to a participant’s account cannot exceed the lesser of 100% of the participant’s compensation or $54,000 ($60,000 including catch-up contributions). Reference: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits

    Reply
    • Jennifer Kincaid

      Thanks! This has been updated!

      Reply

Leave a Reply

Your email address will not be published.

Disclaimer. This communication and all data are for informational purposes only and do not constitute a recommendation to buy or sell securities. You should not rely on this information as the primary basis of your investment, financial, or tax planning decisions. You should consult your legal or tax professional regarding your specific situation. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data's currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.