Let’s talk about your 401k.
Yes, I know that sounds very boring. It’s name doesn’t even have a nice ring to it.
However, do you realize that by not saving enough money in your 401k plan that it could entirely ruin your overall financial well being?
It really is true, trust me.
Each year there is a limit that the IRS places on the amount that your maximum 401k contribution can be for the year. It was $17,500 in 2014. So what happens when you fail to reach the maximum?
The Martians will come and get you.
All your hair will fall out.
You will be passing up on lots of money.
Okay we are being somewhat overly dramatic here. Maybe only one of the above things will actually happen to you (can you guess which of three it is?)
However, the truth is if you would like to avoid sabotaging your finances, then it is important for you to do everything you can to maximize your contributions into your 401k if you haven’t done so already. Most likely you don’t have a good idea of just how much savings you could build if only you took complete advantage of this opportunity!
So let’s take a close look at exactly what all of this can mean for you:
Why It Is So Important To Maximize Your 401k Contributions:
So let’s assume you make one of the two major choices that you can make:
You could act like a total chump and only contribute $100 from each of your paychecks (or $2,600 a year) into your 401k plan each year. Why would you want to do that? Because you think for some reason that there are better ways of spending your money.
Or you could do the really awesome thing and contribute the entire $17,500 amount into your 401k. It might be somewhat painful. However, let’s show you how rewarding that can be.
If you are diligent about continuing along that path and keep earning around 8% each year, how much money will have in your account being awesome versus acting like a chump?
It truly is unreal! The account balance is $294,356 as a chump versus $1,982,456 being awesome. Just think how nice your retirement could be if you have built up a two million dollar safety net?
It really does pay off to be awesome!
The guy that contributes only $100 into his 401k each paycheck unfortunately has become a very common reality for numerous Americans. The average retirement savings in recent studies have shown that most people’s is fairly pathetic. It is only about $80,000.
Think again, if you believe $80,000 is enough for you to retire on. In fewer than 5 years, you will blow right through that.
Then you will have to go back to working again – getting enslaved in a job that you really don’t want. Do you really want to set yourself up for that?
No? Will then be awesome!
How To Get Your Employer Contribution:
This is another very good reason for hitting your maximum 401k contribution each year. This also guarantees that you get the maximum contribution from your employer.
Usually most employers have some type of 401k employer matching program. They place a certain amount into your savings plan to encourage you to save more money for retirement.
For instance: The most common model is receiving 50% on the initial 6% of gross pay. If you earn $60,000, then $3,600 is 6% of that, and your employer contributes $1,800 or 50% of that to your plan. So that really isn’t too bad for just saving money for your retirement!
Although you don’t necessarily need to reach your maximum contribution limit, if you do it helps to ensure you receive the maximum amount possible from your employer.
Saving On Your Taxes:
So do you like to pay taxes? I definitely don’t. I would rather hold onto my money.
One of the main aspects that a majority of individuals are not aware of when it comes to make contributions to their 401k is the amount you save in upfront taxes.
The way this works is that everybody is in a specific tax bracket depending on the amount of money that is actually made. You are most likely in the 25% tax bracket if you are an average American.
If we take a look at our two above scenarios we can see the amount you can save in taxes:
$17,500 x 25% = $4,375
$2,600 x 25% = $650
So you can save $4,375 in taxes each year if you take full advantage of saving the maximum 401k contribution limit. So wouldn’t you rather hold onto $4,375 of your money each year rather than having to pay that to the IRS?
It definitely pays off to know what your limit it and take full advantage of it. That means more money stays in your pocket. So it definitely isn’t a bad deal at all.