Should you invest more than 401k?
Contribute the maximum to 401k before investing in anything else, because it's pre-tax money, thus you'll get tax free growth of it up until you withdraw money, likely when you're in a far lower tax bracket (so paying less of it in taxes than if you had invested elsewhere then collected gains along the way).
You should aim to contribute enough from each paycheck to take advantage of any employer match. If your employer offers a 3% match, contribute at least 3% of each paycheck to your 401(k). After you reach the match, increase your contributions when you can afford to, aiming for 10% to 20% of your paycheck each month.
While the more you can contribute the better, Shannon Lynch, a CFP at Empower, says that it's generally a good rule of thumb to contribute at least enough to get your full employer match if you have one.
Having more than 401(k) account increases the paperwork of saving for retirement, as savers have to keep track of the account statements and other documentation. It can be simpler and easier to develop an investment strategy where all 401(k) accounts are combined into one.
Prioritizing other financial goals and saving strategies ahead of maxing out your 401(k) is often a good decision. While some high-income workers should think about reducing their tax bill today to fund their retirement, not everyone should feel like they must contribute the highest amount possible to a 401(k).
Key Takeaways
An overcontribution is any amount that someone sets aside to a tax-deductible retirement plan that exceeds the maximum allowable contribution for a given period. The IRS imposes a 6% penalty for each year that any excess amount contributed remains in a retirement account until it is rectified.
Many employers match as much as 50 cents on the dollar, on up to 6% of your salary. Most advisors recommend contributing enough to get the maximum match. Turning down free money doesn't make sense unless the fund is so bad that you're losing most of it to fees and substandard returns.
By age 35, aim to save one to one-and-a-half times your current salary for retirement. By age 50, that goal is three-and-a-half to six times your salary. By age 60, your retirement savings goal may be six to 11-times your salary.
401(k) contribution limits 2024
For 2024, those 401(k) contribution limit is $23,000, and $30,500 for those 50 and older due to catch-up contributions. $23,000. $7,500. Cannot exceed the lesser of $69,000 or 100% of employee compensation, whichever is less.
The value of 401(k) plans is based on the concept of dollar-cost averaging, but that's not always a reliable theory. Many 401(k) plans are expensive because of high administrative and record-keeping costs. Nonetheless, 401(k) plans are ultimately worth it for most people, depending on your retirement goals.
How much will a 401K grow in 20 years?
As a very basic example, if you had $5,000 in your 401(k) today, and it grew at an average rate of 5% per year, it would be worth $10,441 in 20 years—more than double. If you withdraw those funds early, however, you're not only facing a stiff tax penalty, you're losing all of that additional growth.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
The Bottom Line. For most people, the 401(k) is the better choice, even if the available investment options are less than ideal. For best results, you might stick with index funds that have low management fees.
One of the biggest perks of a 401(k) retirement account is the employer match that many companies offer with it. Because a company match is essentially free money, most financial experts advise people to contribute at least as much as their employer's maximum match amount.
Most retirement experts recommend you contribute 10% to 15% of your income toward your 401(k) each year. The most you can contribute in 2023 is $22,500 or $30,000 if you are 50 or older (that's an extra $7,500). That number has only been increased by $500 for the 2024 tax year.
Traditional guidance is that the percentage of your money invested in stocks should equal 100 minus your age. More recently, that figure has been revised to 110 or even 120 because the average life expectancy has increased.
It may take some courage, but increasing your contributions to retirement accounts during a recession can be a great financial move. You benefit by buying a lot more when prices are down, setting your portfolio up for future success when the economy recovers.
The growth of your 401(k) largely depends on the amount of money you contribute to your account each year as an employee and the matching contributions that your employer adds to your account over time. The more money you and your employer contribute to your 401(k), the more potential it has to grow.
Increase your financial security
A larger savings balance offers more financial security than a smaller one. It doesn't take long to build a substantial amount of savings if you max out your 401(k) each year, making it easier to reach your retirement goals.
Market downturns can make you feel like you're even more behind in your savings goals. “We believe the key thing to do is to keep your 401(k) funds invested. If you take them out of the market, you may lock in losses and could miss out on opportunities for market rebounds.”
Why you shouldn't max out your 401k early?
It's never too early to set up a 401(k)—but there's no real benefit in maximizing your contribution as quickly as possible when offered an employer match. By maximizing your 401(k) annual contribution at the beginning of the year, you could miss out on your employer's maximum matching contribution.
Anything above 5% of compensation is considered a good employer match. As you'll see below, some companies offer employer matching up to 25% of compensation. Of course, employees are bound by the 401k contribution limits set by the IRS each year, which is $23,000 ($30,500 if age 50+) in 2024.
By age 30, Fidelity recommends having the equivalent of one year's salary stashed in your workplace retirement plan. So, if you make $50,000, your 401(k) balance should be $50,000 by the time you hit 30.
A study by Vanguard reported that the average employer match was 4.5% in 2020, with the median at 3% of salary. In 2023, if you're getting at least 4% to 6% in 401k employer matching, it's considered a “good” 401k match. Anything above 6% would be considered “great”.
If you have $400,000 in the bank you can retire early at age 62, but it will be tight. The good news is that if you can keep working for just five more years, you are on track for a potentially quite comfortable retirement by full retirement age.
