Andy Hill, the 37-year-old blogger and podcaster behind “Marriage, Kids and Money,” went from sorely lacking in retirement savings — to maxing out his 401(k) plan the last six years.
The father of two, who is also a sales director for a marketing company in Michigan, said he’s been amazed by the power of automation, and has already saved more than $130,000. Aside from “setting it and forgetting it,” Hill said he researched low-cost index funds and rode the stock market as it climbed upward. “When you’re in your 30s, it is tough to think of what retirement might look like in your 60s, but what gets us both excited is how compound interest can make a big leap,” he said.
Hill and his wife, Nicole, also paid off their mortgage in four years, and already max out their Roth individual retirement accounts.
Reaching the maximum limit for 401(k) contributions (which is $19,000 in 2019 and an additional $6,000 for those 50 and older) is not an easy feat, and only a fraction of investors actually accomplish it. Only 13% of participants maxed out their 401(k) in 2017 (when the limit was $18,000), according to a 2018 Vanguard report about its investors. What’s more, these investors had higher incomes, were older and had longer tenure at their employers. Comparatively, 9.1% of workers whose 401(k) plans are managed by Fidelity Investments reached the cap, up slightly from 9% at the end of 2017 and 8.1% at the end of 2013. Boomers were most likely to max out their 401(k) plans, followed by Generation X, and lastly millennials.
Hill acknowledges income growth is a crucial part of maxing out a 401(k) or other workplace retirement account, but that may not come naturally. A few ways to see an increase in earnings include looking for jobs with upward mobility (when possible) or negotiating a salary during the hiring process. Employees should also take the company match for a 401(k), which is often called “free money,” if they can, and look at how their retirement portfolio is invested, as not all funds are the same.
Income growth helped Richmond Howard, a pastor in Texas, maxes out his 403(b) plan, the 401(k) equivalent for nonprofits, but there was another key component: discipline, he said. When he and his wife were newlyweds, Howard was unemployed for almost five months and then went to grad school, so frugality was necessary. They cut costs by downsizing their home and stayed there even after they could afford to move because it helped them aggressively save. “We want to front-load our retirement savings in our 20s, so it can grow as long as it can,” he said.
They didn’t deprive themselves of everything, occasionally going out with friends or taking a vacation, but they used other savings techniques, like eating many home-cooked meals. The pastor, who also blogs at PFGeeks, acknowledges he and his wife were also privileged to graduate college without student debt. They recently bought a home, and have a car loan, but didn’t put as much down on the mortgage or paid off their auto loan because they know they’ll be able to do that in a timely manner, unlike saving for retirement. “You can get a loan for a car, but when you’re 65, you can’t get a loan to live,” he said.
Maxing out a 401(k) at any age will help in retirement, but especially the sooner one starts. The same is true of simply beginning to save any bit for retirement. “The amount ultimately accumulated for retirement is a function of not only the amount set aside, but also the time frame and rate of return,” said Peter Palion, a financial adviser and president of Master Plan Advisory in East Meadow, N.Y. “A younger person (say in their 20s or early 30s) may not necessarily have to max out (although it certainly won’t hurt anything).”
Thinking of 401(k) contributions in dollar figures can be overwhelming, so Fidelity suggests focusing on percentages, and aiming for 15% of salary shared between employee and employer, said Eliza Badeau, director of workplace thought leadership at Fidelity. “This is not something everyone can do right away so the most important thing is to start early and increase over the course of years,” she said. Companies are beginning to automatically enroll their employees in retirement accounts, but workers should periodically check in to adjust contribution rates and make incremental increases after a raise or job change. Traditional 401(k) plans use pretax contributions, which means a paycheck does not reflect as large of a decline as it would if the account was made up of after-tax dollars.
There’s one more reason saving the maximum amount allowed in a 401(k) will benefit workers: to prepare for the unexpected. That’s one reason why Hiro Nishimura, a 29-year-old IT specialist in New York, is aiming to max out her 401(k) plan — and why she’s deferring nearly a quarter of her salary to do so. Nishimura sustained brain injuries from a brain surgery in her early 20s and last year was diagnosed with rheumatoid arthritis. “I feel like I’m at this point in my life where I can and should do it, because I don’t know when I will stop being able to work,” she said.
Nishimura slowly increased her contributions, and said the process was almost like an experimentation — upping the percentage a few points at a time, worried it would take too much of a chunk of her paycheck, and then realizing it didn’t hurt so much. When she got a raise, she’d put it all toward her retirement contribution, so she wouldn’t feel as though she lost anything. Her diagnosis may prevent her from working for the next few decades, or it might not — but she wants to be prepared, and maxing out her 401(k) plan while she’s working is one way to do that. (Also, the Internal Revenue Service waives the early withdrawal penalty for 401(k) assets if the individual claims he or she has a long-term disability.) “I realize how fleeting this moment could be,” she said.