If you’re lucky enough to have a job where your benefits include a 401(k) retirement savings plan or similar account, here’s some good news: For 2019, you can save an extra $500 per year in your plan, thanks to cost-of-living adjustments by the friendly folks at the Internal Revenue Service. Added to the 2018 limit of $18,500 that means you can save a total of $19,000 a year, all tax-deferred until you retire and take withdrawals.
The limit applies to the total of all your 401(k) contributions during the year, as well as any IRA or Roth IRA contributions. If you’re older than 50, you can contribute another $6,000 per year in “catch-up” contributions since you’re getting close to retirement age. The new limits also apply to similar 403(b) plans, most 457 plans and the Thrift Savings Plan offered to federal government employees.
All that doesn’t include any employer match, where the company contributes money along with your contributions, usually 30 percent or 50 percent of what you save up to a limit of your salary, such as 3 percent, 5 percent or 15 percent. For 2019, the employer match is limited to $37,000. So, depending on how generous the match is and how much you make, you could sock away as much as $56,000 a year or, if you’re older than 50, $62,000.
Now for the bad news
Most of us won’t ever come close to hitting those contribution limits. According to the most recent Bureau of Labor Statistics data, as of March 2016 less than half of all workers eligible to participate in a 401(k) and similar plans actually put money into their accounts.
The highest participation rate is 63 percent for management and professional workers, while the lowest is the service sector, where just 19 percent of workers contribute to their accounts.
And remember: Not all workers have access to these kinds of plans. According to an analysis by The Pew Charitable Trusts, 35 percent of private sector workers older than 22 work for firms that don’t offer a plan; for millennials that rate goes up to 41 percent.
Even those workers who do participate tend to save at low levels – less than 10 percent of their wages – and many participants damage their savings and returns by taking loans and early withdrawals from their plans, which can result in taxes, penalties and lost opportunities for investment gains.
Put it all together, and the average 401(k) account balances show that people are saving, at best, a few thousand dollars a year in these tax-deferred plans. According to Fidelity, as of the second quarter of 2017, the average account balance was $97,700. Along age groups, it breaks down like this:
- Ages 20 – 29: $9,900;
- Ages 30 – 39: $38,400;
- Ages 40 – 49: $91,000.
A good rule of thumb for retirement saving is to accrue half of your annual salary by the time you’re 30 years old. In this case, the average 20-29-year-old 401(k) saver either makes just $20,000 a year or is saving about half of the recommended rate.
Where to start if you haven’t already
If you’re under-saving or not saving at all, what can you do? It’s simple: start small, regularly increase your contributions, track your investments and don’t pull money out of your account unless it’s to keep you from starving or going to jail. Here’s one simple way to go:
Start small: If your workplace offers a retirement savings account, sign up for it. Start with 2 percent of your salary, which is deducted pre-tax, which means your take-home pay will be reduced by less than the amount. If you think you can’t afford to save, consider this: On a $30,000 annual salary, the amount is less than $12 a week.
This level of savings will likely be matched at 30 percent to 50 percent by your employer, which not only is free money but also guarantees you a whopping automatic 30- to 50-percent gain on your investment. In some cases, your employer may automatically enroll new workers in the plan.
Start on your own: If your employer doesn’t offer a match on your plan, skip it and open a Roth IRA, which you can do online, and have the same 2 percent deposited. You won’t defer paying taxes on the contributions but you’ll never have to pay taxes on your gains, which is very valuable. In a real emergency, you can withdraw contributions from a Roth IRA (but not gains), and must notify the IRS to avoid paying tax and a fine.
Invest in stocks: Keep it simple to start. Go 100 percent into a big, diverse stock index fund, such as one that matches the S&P 500 or the Wilshire 5000. If your employer automatically enrolled you, the money likely is going into a low-yielding money market account, so find out how to change that. Avoid investing in company stock, which is too risky. Since you already get your entire paycheck from the company, it’s not smart to risk more of your money in its stock.
Diversify: As you build your balance to a respectable few thousand dollars, you can diversify to this recommended mix from 401khelpcenter.com: 40 percent in large-cap growth funds; 25 percent in small-cap growth funds; 25 percent in large-cap value funds; and 10 percent in a foreign stock fund. Rebalance your holdings at least once a year (twice is better), which means adjust your investments back to this ratio, which can boost your gains, as explained here. Some providers will do this automatically if you set it up that way online.
[For further tips to kick-start your retirement savings journey, check out: Saving Money for Retirement.]
Whatever you do and no matter what amount of money you can save, it’s better to start sooner than later, stick with basic investments and then adjust your contribution rate and investment choices as you build your account and get more experience and education.
Brian J. O’Connor is the author of the award-winning budgeting book, “The $1,000 Challenge: How One Family Slashed its budget without moving under a bridge or living on government cheese.”
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