The very thought of maxing out my 401k was laughable about 6 years ago when I first heard people actually did it. I Thought it was limited to doctors, lawyers, or corporate directors and above. I am none of those things. I actually decided to stay out of the management track and wouldn’t last a day as a doctor. Good news all! it is possible to max out your 401k without making CEO level money.
For anyone thinking that investing heavily in 401k plans was ingrained into my brain as a young child or I am some sort of saving genius.
Nope. I’m not.
I didn’t know shit about them when I started my career over 7 years ago. In fact, It was the complete opposite. I wasn’t even getting the full 401k match the first year. OHHHH THE SHAME! (said in Pumbas voice, my kid likes Lion King).
So how can we go from contributing a measly 3% and not getting the full company match to maxing out my 401k ($18,500) in 2018?
The Steps I took to Max Out My 401k
Before we even get to the steps I am going to make maxing out your 401k a little less daunting. 401k math works for you!
401ks are a tax-advantaged account. Whatever you contribute is not taxed, which saves you money instantly. It also means that the amount you contribute won’t come straight off your take-home pay.
Example using my wife’s 401k
Over the course of the year, we contribute $10,080 to my wife’s 401k. However, we won’t see a $10,080 dent in her take-home pay.
For every $100 we saved, it only cost us $79 in our take-home pay. The other $21 comes off the top via tax savings.
Over the course of the year, we will contribute $10,080 to her 401k and it will only “Cost” us $7,920 due to the tax savings this year. I say “Cost” because all the money is still ours, we just can’t get to it for about 30 more years.
That is a net savings of $2160/year. For paying ourselves.
The money you put into a 401k comes straight off the top of your highest taxed income. Beautiful.
*Yes, I know most people won’t see these numbers right away unless they can start contributing $10K right away, but it is the reality if you put in the time and effort I highlight below. Your tax situation is likely different than ours, this is an example only.
Step 1: Get The Full Match
Common (but great) advice, getting the match is the first step.
While this seems like a no brainer, put yourself in the shoes of someone just starting out their career. You are pumped to get a real paycheck, thinking you are going to be rolling in cash. Then adult reality hits:
- Student Loans
- Health Insurance
- Taxes (more than you were paying working summer jobs)
- Paying for your own phone bill
- 1 million other shitty adult things
After all of those take a sizeable bite out of your paycheck, shaving another 3-8% off the top sounds pretty lame. How are you supposed to hit the bar twice a week if you don’t have cash?
Tough love. This step is mandatory. Period.
Sooner than later (and hopefully much sooner), you have to prioritize something besides spending. If your employer gives a match, I can’t think of any other place in the investment world that gives you a 100% return on a chunk of money instantly. Not to mention you don’t need to pay taxes on it (right now at least)
Step 2: Small Incremental Increases
After getting the free money, we set very small goals spread out over the course of a year to increase our withholding. I’m talking as small as a 1% increase, each quarter. While that sounds depressingly small, and at first it might be, you are doing something well beyond the dollar value
Building good habits around saving
Habits compound just like money does. Eventually, you won’t even realize you are missing a part of your paycheck.
For those that say the can’t save 4% extra over the course of a year, I feel ya. It looks daunting if you just take .04 times your yearly salary. I love this approach is it spreads the “pain” out over the course of a year and allows you to slowly adjust to the slightly lower paycheck.
Some more 401k math to put you at ease
4% of a $60,000 salary is $2,400. Not a nominal sum to someone making $60,000 a year.
Divided out that is about $92 per paycheck
Going one step further that is only $46 dollars per week.
$46 that is reduced further by the awesome 401k math we saw above
Remember you are also easing into that number over the course of a year, which means you can gradually skip a coffee, pack a lunch or cancel an unused service (see my post 35 Actionable Money Hacks if you want 32 more ideas).
Step 3: Increase your Income
Step 1 is mandatory, Step 2 builds good money habits and Step 3 can have, by far, the biggest impact.
It’s incredibly difficult to max out your 401k making the median household income of just over $60,000/year in the United States. Is it doable? Yes, but it is going to take a crafty living situation with some well-coordinated frugality. If you have kids, student loans or any other significant debt, you are looking at a steep climb.
In other words, without growing top-line income, maxing out your 401k is going to be incredibly difficult. My starting salary was $36,000 in 2012, maxing out my 401k would have been just under half of my salary. Not.Going.To.Happen.
After peaking at those facts, I knew the only way to do this was to make more money
I went from $36,000 to $92,000 in 7 Years, increasing my income by over 2.5X
Income growing tips:
- Curate a positive reputation
- Know/Understand salary ranges for your area and position
- Getting the Most out of Yearly Raises
- Relentlessly Pursuing Promotions
- Asking for a Raise When Responsibilities Expand
- Don’t EVER Waste An Opportunity to Negotiate
Read my full income increasing post where I break down each tip: How to increase your income
We are a dual income household, and my wife also contributes over $10,000 to her 401k plan. I want to be fully transparent about having 2 incomes, but also highlight that we weren’t frontloading mine so I can write this post.
Step 4: Increase 401k Withholding as Income Increases
Increasing income is not easy.
logging into your HR or 401k providers site and changing your withholding is!
Follow up that new salary with a trip to wherever you need to increase your 401k contributions and do it. The same day, don’t wait. Action = Wealth
Every time I got a raise I would increase my 401k withholding to speed up the progress. Sometimes it was an extra 1% bump. Sometimes I would calculate how much more I would make per check and contribute the entire raise to my 401K. Automation wins.
Step 5: Repeat Step 3 and 4 until you max out your 401k
I didn’t max out my 401k for the first 6 full years of my career even though maxing out my 401k was a consistent thought and goal for 5 of those years.
THIS DOESN’T HAPPEN OVERNIGHT
It took 7 yearly raises, 5 promotions and a job change with a salary negotiation to make it happen.
Get the match, build solid savings habits, and start pumping that income up. Half the battle is sticking it out until it happens.