A New Year and a New 401(k)

2019 is a new year and a great time to evaluate your long-term financial goals. In 2019, the IRS raised the contribution limit by $500 for 401(k)s, 403(b) and Thrift Savings plans to $19,000 annually. This is the second consecutive increase in 401(k) contribution limits, so the government is trying to promote increased 401(k) savings. However, to most Americans the prospect of maximizing their 401(k) is a daunting task. According to the Federal Reserve, a median household in the United States makes ~$61K annually and would need to save almost 31% of their annual income in a 401K to meet this goal. This is the reason only a small percentage of 401(k) plan participants maxed out their 401(k) according to Vanguard.

So let’s talk strategy on how to make the most of your 401(k) plan in 2019. First, let’s benchmark ourselves relative to the neighbors. The average deferral rate for a 401(k) has remained steady around 6.8% over the past few years and for the median American this equates to about $4,100 in contributions annually. Are you above or below this benchmark? If you’re below the benchmark, you may not be taking full advantage of your employer’s matching program. Sixty-nine percent of employers match between 5-7% of your salary. The majority of people are already taking advantage of this matching program, but never hurts to double check what benefits your employer is offering.

Consider adding $500 annually to your annual 401(k) contribution. This amount corresponds with the contribution limit raise which typically rises with inflation. It is also common for 401(k) plans to assist you in raising your contributions as most of the plans include an automatic 1% step up annually to help push you to save more. Saving 1% more per year is only $600 annually, or $50 month. However, the impact of saving just a little bit more can be great. For a 40-year-old with 6% investment returns annually, this translates into $900 more in additional annual income in retirement. Save now for retirement.