This can give your retirement accounts the boost they need.
Understanding your 401(k): How it works and why it matters.
What is a 401(k) plan? Key benefits and how to maximize your savings.
If retirement were simply a matter of desire, today would be the last day of work for many people. Unfortunately for them, it’s not that simple. These days, you need to save a lot of money to retire comfortably, especially if you expect to retire early or live a long life.
Your savings rate is your biggest constraint when it comes to your retirement schedule. But rules for retirement accounts are also important. The annual contribution limit for a 401(k) has now jumped to $24,500, and those who can afford to take advantage of all of these account offers could find themselves reaching their retirement date much earlier than expected.
How maxing out your 401(k) will affect your retirement schedule.
A $24,500 contribution to a 401(k) is quite large. This amount is already enough to cover several months of living expenses for most people. But when you invest that money, it becomes even more valuable.
Let’s say you’re 40 years old and haven’t done anything to save for retirement yet. If you max out your 401(k) this year by age 65, that $24,500 will grow to more than $265,000, assuming an average annual return of 10%. This doesn’t count any employer matches you receive because you stashed money in your 401(k).
Obviously, this is still not enough for most people to retire, but it’s a great start. Even if you start saving late, maxing out your 401(k) for a few years can put you in a very good position. And if you’re a regular saver, putting $24,500 into your 401(k) each year could help you reach your goal faster.
The $24,500 contribution limit won’t change things for most people
Increased 401(k) contribution limits are a big benefit for those who can take advantage of them. But the reality is that most people today can’t afford to give up $24,500 of their annual salary. They need that money to cover their bills and save for more immediate goals. For these people, higher contribution limits make no difference.
The good news is that it’s possible to retire without maxing out your 401(k). It will take you longer to reach your savings goals, and you will have to be more consistent with your savings than someone who can afford to put tens of thousands of dollars into retirement each year. But it’s possible.
If you save $400 a month at age 25, you’ll still have more than $2.1 million by age 65 at an average annual rate of return of 10%. Even if your investments don’t perform that well, or you have to stop contributing for a short period of time, you still have a chance to retire comfortably.
Instead of trying to max out your 401(k), figure out how much you can comfortably save and start from there. Then, if you get a raise or find extra money in your budget, you can consider increasing your contribution rate later.
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