Planning for retirement can feel like navigating a labyrinth. With so many variables and choices, it's easy to make mistakes that could jeopardize your financial future. One common error, especially among high earners, is not contributing enough to their 401(k) plans.
In this blog, we’re exploring why this can be a problem and how you can avoid it to help ensure a comfortable retirement.
Many high earners, those making $100,000 or more annually, and HNWIs, those making a million or more, are not maximizing their 401(k) contributions. According to Vanguard's "How America Saves" report, only 14% of individuals maxed out their contributions in 2023 when the cap was $22,500. Even fewer people take advantage of catch-up contributions available to those over 50.
Relying solely on your company's matching contribution is a risky strategy. While company matches are beneficial, they typically cap at a certain percentage of your salary, often around 6%. This might seem sufficient, but it's usually not enough to ensure a stable retirement income.
Failing to contribute enough to your 401(k) can likely cause significant income shortfalls in retirement. This could mean having to drastically change your lifestyle or even running out of money during your golden years. Planning ahead and contributing more can help avoid these outcomes.
For 2024, the maximum 401(k) contribution is $23,000. Those over 50 can contribute an additional $7,000 as catch-up contributions. It's crucial to understand these limits and aim to contribute as much as possible.
High earners often fall short due to psychological and behavioral factors. Many people are anchored to the idea of contributing only up to the company match or have other financial priorities that seem more immediate. However, it's essential to prioritize retirement savings to help secure your future.
To avoid falling into the trap of under-contributing, set realistic goals and gradually increase your contributions. Many plans offer automatic escalation features that increase your contributions annually. Additionally, adjust your contribution levels with each salary increase to help ensure you’re saving as much as possible.
While 401(k) plans are a great tool for bolstering your nest egg, relying solely on them is not advisable. Diversifying your retirement savings with other retirement and investment accounts can provide additional security and flexibility. Here are some of the best ways to achieve this diversification:
Maximizing your 401(k) contributions is crucial for helping you secure a comfortable retirement. Don’t fall into the trap of under-contributing. Understanding the contribution limits, setting realistic goals, and diversifying your savings can help you ensure a stable financial future.
Also, consider seeking personalized advice from wealth managers like NJM Wealth Preservation Strategies to help you develop a retirement plan.
NJM Wealth Preservation Strategies offers a comprehensive approach to retirement planning, helping ensure that your financial future is secure. Here’s how we can assist you:
For more information on our services, or to schedule a complimentary consultation, contact us today!
1. What happens to my 401(k) when I retire?
Upon retirement, you have several options for your 401(k):
2. When can I start withdrawing from my 401(k) without penalties?
You can begin withdrawing from your 401(k) without penalties at age 59½. Withdrawals made before this age are generally subject to a 10% early withdrawal penalty and income taxes. However, there are certain exceptions to this rule, such as financial hardship, permanent disability, or separation from service after age 55.
3. What are the tax benefits of a 401(k)?
Contributions to a traditional 401(k) are made with pre-tax dollars, which can help reduce your taxable income for the year. The investments grow tax-deferred, meaning you don't pay taxes on any earnings until you withdraw the money, typically in retirement when you may be in a lower tax bracket.
4. What is a Roth 401(k) and how is it different from a traditional 401(k)?
A Roth 401(k) is similar to a traditional 401(k) but with a key difference in tax treatment. Contributions to a Roth 401(k) are made with after-tax dollars, meaning you pay taxes upfront. However, withdrawals in retirement are tax-free, provided you meet the criteria (typically holding the account for at least five years and being 59½ or older). This can be beneficial if you expect to be in a higher tax bracket in retirement.
5. Can I borrow from my 401(k)?
Many 401(k) plans allow you to take loans from your account. The maximum loan amount is generally the lesser of $50,000 or 50% of your vested account balance. Loans must be repaid with interest, typically within five years. If you leave your job before repaying the loan, the outstanding balance may become due immediately, and any unpaid amount could be considered a taxable distribution and subject to early withdrawal penalties.