Advice to invest in your 401K is everywhere, as it should be, it is one of the best retirement vehicles available in the United States. Today I am going to show you some proof that if you start with small investments and iterate as your income grows, your 401K balance will explode over time. I am not mocking the numbers, below you will see a quarter by quarter breakdown of my 401K balance, directly from my statements.
Before diving into all things 401K, I want to note that we also use a Roth IRA. I think there is value in spreading money across both tax vehicles. Roth IRAs are also a good solution for financial windfalls outside of your 9-5 paycheck.
Proof you need to start investing in your 401K
The next few sections show 5.5 years of 401k contributions, employer matches, growth (or loss) and the total portfolio balance broken down by quarter. Graph and number nerds, enjoy!
It’s like stealing money from yourself but for future you
I have mentioned this before, but when I first started my career we were saving next to nothing. Looking at the below graph, I was saving well under $500 a quarter for the first 1.75 years. By the end of 2016, I was saving about $2,000 a quarter.
Methods used to increase 401K Contribution
- Set yearly goals to increase my withholding % each quarter in 2015 and 2016
- As my income rose, I increased the automatic contribution so my take-home pay didn’t change
My goal is to eventually max out my 401K contribution by increasing the allocation everytime my income increases. This year I am on track to contribute $12,800. I remember reading Financial Samurai’s The Average 401k Balance And Why It’s Too Low post about 3 years ago and thinking it was impossible for me to put $18,000 away every year.
It’s not impossible, he is right, anyone can do it if they make it a priority.
The dips from previous quarters are caused by a variation in the number of paychecks. I have not reduced my contributions since I started.
Remember the employer match
Gotta love free money! Our match is below the industry average. We only get a 1.5% match if we put 6% in, but that still adds up over time and makes a huge impact when compound interest is factored in. The good part is the match increases with your salary, extra savings every time you get a raise. AUTOMATICALLY.
For those of you who have a better match, I am jealous. For those of you who have a better employer match and aren’t taking advantage of it, get with the program!
I was not eligible for the employer match my first year of employment. Over the last 4.5 years, my employer put over $3,800 into my account. It would have been more if I would have jumped right to 6% when I became eligible. Don’t wait!
There will be ups and downs
Not much to say here except for I have been riding a 5.5-year bull market since I started investing. There was only 1 ugly quarter that flipped pretty quickly. It was a little funny looking back at the first years 401K statements and seeing a $23 loss over the course of 3 months.
I am looking forward to bigger swings on a quarterly basis as my balance grows. Eventually, the gains will eclipse my quarterly contributions.
Hard to argue with the results
From $0 to $27,480 in 5.5 years.
While this looks like a pretty standard up and to the right graph, I want to point out a few things
- Took 9 quarters to accrue first $5,000
- The last $5,000 only took 2 quarters.
- My quarterly contribution has been enough to offset any market loss to date. I expect that to change as my balance increases but that is still a ways out.
Number breakdown
- Employee Contribution – $20,575.47
- Employer Contribution – $3,823.51
- Total Gain – $3,021.03
- Portfolio Balance – $27,480.18
Oh, and there is the tax savings
Money put into your 401K is not taxable, so there are significant tax savings every single year you contribute. Over the last five years, I saved over $5,000 on my tax bill. Since Mrs. AE also contributes our household savings are even higher. In 2017 alone, we are expecting to save another $5,000 (assuming we contribute $20,000 combined this year).
Employer 401K matches are also not taxable, so it’s free and tax-free. Boom.
Way down the road, you will have to pay taxes when you withdraw from your 401K, but the idea is that you will be in a lower tax bracket and the growth on the tax-free money will outweigh tax costs.
For above average earners that still have student loans or contribute to a Roth IRA, you can use your 401K to reduce your income and drop below the “phase out” limits for contributing to a Roth IRA or deducting Student Loan interest on your taxes.
What can happen over 30 years
If you want to see what investing in your 401K can do over 30 years, check out this awesome post “How to become a 401K Millionaire.” There is a ton of great information from Fritz, who is rapidly approaching early retirement. He writes at The Retirement Manifesto and recently published an awesome post for people who are starting their journey a little later as well: It’s Never Too Late To Start Saving For Retirement.
Start Now
If you are already a regular 401K contributor, Great! Keep working your way to the maximum limit and watch your balance grow while enjoying awesome tax benefits. If you need some motivation, try setting yearly goals. Increase your contribution 1% a quarter or dedicate your entire raise to your 401K every year.
If you are like me 4 years ago and aren’t investing up to your employer match, your number 1 priority should be getting the full amount. Don’t let free money slip through your fingertips.
Even if you don’t get an employer match, the tax benefits alone are worth it. Don’t sacrifice YOUR future because they aren’t matching anything.
If your significant other is also investing in their 401K, you could be a double 401K Millionaire. Think of the possibilities…..
Great post – hopefully it will help inspire people to contribute to their 401k! Today I contribute the federal max, but I started out like you at just around $2,000 per year. My secret was that every time I got a raise, I would increase my 401k contribution by half of that. So if I got a 3% raise, an extra 1.5% would go toward the 401k and the rest to me. So it still felt like I got a raise, but I really also put aside more for the future! It took a long time to reach the federal max but I did it. Looks like you’re well on the way!
Hopefully, I can get there over the next 2-3 years, made some big jumps last year. Banking raises is a great srategy!
The raise trick is totally how I got my 401k contribution up there too. It took a while, but eventually we started hitting the IRS max for both myself and my wife. Smartest move ever!
Ahhh, I drool at the idea of an employer retirement match. If your employer offers this, please take advantage of it! I’m a contractor and get zilcho for benefits, so I’m on my own with contributing to my Roth IRA. It’s always better to put something aside, even if you can only do $20 a month.
Yea, our crappy match is better than no match (barely 🙂 ). Health Benefits are pretty good at least.
Thanks for the comment!
Great post. Definitely shows the advantage of time and compounding. Also a great tip to increase your withholding rate at regular intervals, whether it be quarterly, semi-annually, or annually. It’s a great way to increase your savings rate. Thanks for sharing!!
Thank you!
1% a quarter is a good way to push yourself until it gets too difficult, then you can maintain or back off a bit the next quarter
The phase out limits are a major reason to go with a 401k. The obvious are traditional IRA or Roth but to be honest there are many more as your income rises. Your 401k makes the biggest dent in those threshold of all avoidance strategies.
Agreed on that front, it’s nice between two 401Ks an FSA/HSA we could make a significant dent in our taxable income and keep us below those max income thresholds for the for the foreseeable future.
Employer matches are the best! I was fortunate to get the equivalent of a 10% match for the first 3 years of my career. However, my match went down this year to 8% 🙁
Keep up the good work on upping your contributions! You’re doing great!
8% sounds pretty damn good to me – haven’t heard of many over that.
Thank you!
What’s a 401k? Just kidding! We are missing out majorly by not investing in our 403bs. The problem is they are so fee-laden that it just gives my overly cautious self a reason to not take the plunge. Once things are situations with Half Penny and my salary goes back to normal after next school year, we’re going to have a great taste of just how little we can live on. The goal is to divert all of the “extra” money that I’ll get from my full salary into retirement vehicles. For now, Roth and taxable it is. Oh, and our pensions. Not that I’m banking on those being there…but we do both put 9% of our salaries towards that in every (not by choice).
Awesome plan! Are they more fee-laden than corporate 401K plans? Ours is pretty good on that front at least.
Taking money that you can’t depend on getting later, so sad. That would drive me nuts.
Initially, I disliked having a pension, or the monthly withdrawals from my check. But now, I look at it as an opportunity; it is another tax-advantaged account!
Once I am maxing out my 401k, there should be another ~$5,400 socked into the pension fund for the year. With my employer, the pension can be rolled over into a Traditional IRA when I leave.
Pensions aren’t a bad way to pad the investment account column on the spread sheet!!
Man, that’s a terrible match. Better than nothing though. One of the first things I did when i started working 11 years ago was set my 401k contribution at 20%. I wish I would have done more looking back on it as you don’t miss what you never had.
Yea, it has been the main complaint on every survey my company has filled out. I have heard they are considering increasing it, hopefully, a full percent match up to 6.
If I knew what I know now I would have started at 8-10% right out of the gates and banked my raises. Would have been nice
Man, I wish personal finance blogs were around when I was 24 and arrogant. My friend worked at Fidelity at the time and said I should start investing. I just ignored her. Anyway, I turned out alright with catch-up contributions, but if I had seen how much money could have been made by me virtually doing nothing, then who knows where I’d be now.
And yes, if you are not contributing up to the employer match, you’re giving up free money. It’s that simple. My matches have ranged from 6% down to a paltry $250 (why bother?). It’s definitely one reason why I prefer bigger companies nowadays.
I dream of a 6% match, I know its out there but I haven’t put a priority on finding it yet (plus I like my current employer – for the most part).
Even though I only missed out on a few years, I kick myself for not starting at a higher percent earlier.
Thanks for the peek behind the curtains. These are the types of post that do the most for me. Seeing actual numbers from real people is motivating to me.
I think we’re finally in a spot where we can start to do as you so wisely recommend and use our IRA as a place to store all financial windfalls outside of your 9-5 paycheck. I’ve been doing something different with the small amount of money that money that my blog makes – one of these days I’ll do a post on that.
I love seeing real world examples (your recent income post is a great one).
Yea, I really like having the Roth funded by windfalls, so hard to pass on tax-free growth
Great post! The figures and the graphics can’t be ignored!
Mr. Groovy and I always contributed to our 401 and 403 plans. My employer matched 8% and Mr. Groovy’s matched 3%. But maxing them out during our last few working years made a huge difference, both in savings as well as taxes. We were also able to take advantage of the additional $6K for those over 50. I worked my way up incrementally to the max over a few years. I feared we’d miss the money but we really didn’t make a big adjustment.
Thanks, Mrs. Groovy!
8% is an awesome match, I hope our HR team realizes how crappy ours is sooner than later!
The tax benefits are awesome! Money straight into your pocket on day 1.
Sincerely honored to be cited in your article! I agree (and am living proof) that the 401(k) is the best tool in the investment box for setting yourself up for an early retirement. Start early, and increase your savings rate every chance you get. Great post, thanks for including me!!
Thanks, Fritz – Happy to include a true 401K Millionaire!
Hey, AE. Late to the party here, but I just wanted to say that you’re doing a wonderful job. The tools are there for anyone to be an IRA or a 401(k) millionaire. The key is to just start as early as you can and increase your contribution 1% every year until you’re maxed out. Thank you for providing the proof. May an ever increasing number of Millennials start heeding your advice.
Thanks, Mr. Groovy! The more the merrier in 401K Millionaire land.
I couldn’t agree more. I think too many of our generations are obsessed with getting the latest gadget or following the latest trends. In the long run, all of that is just a drain on your future financial resources! I believe in investing in my own businesses and future finances.
Thanks, Troy!
And out of all the things to buy, spending a lot of money on clothing/fashion is probably the worst.
Honestly not many people are going to care what others wear. And trying to wear nice clothing is pointless if you don’t have a fit body!
E.g. I sometime see women who are heavily overweight wearing pricey lululemons, and it’s like “I don’t think that looks good on you”.
Dress decently and focus on building a better you – that’s what I believe in.
Great job contributing to your 401k! If you keep it up, you’ll be passing the 6 figure mark in a few years! It feels great when you finally max out your 401k.
Thanks, David. Looking forward to hitting that max and going over 100K in my 401K will make me very happy.
I love this, and you’re so right! The fact that Mr. ONL got a jumpstart on his 401k and started maxing in his mid-20s is the single biggest reason why we’re comfortable retiring early — we know we already have a bigger cushion than we’ll ever need sitting there waiting for us when we’re in our 60s, so we know we can live a bit leaner in the years between now and then and be fine. Such an incredible comfort!
Maxing out in mid-twenties is a huge accomplishment, and glad to see we have another awesome example of (soon to be) early retirees that utilized their 401Ks. The results don’t lie!