Though many seniors rely heavily on Social Security to pay the bills once they stop working, the reality is that those benefits aren't designed to sustain retirees in the absence of additional income. In fact, they'll generally replace about 40% of the average senior's pre-retirement earnings, when most retirees need roughly twice that amount to manage their living expenses.

That's why saving independently for retirement is so important, and when it comes to savings tools, 401(k)s offer several advantages. Not only are they easy to fund, since contributions are made via automatic payroll deductions, but the annual contribution limits associated with them are pretty generous.

Envelope labeled 401k with hundred dollar bills sticking out of it on a wooden surface next to a calculator and eyeglasses


In 2019, workers under 50 can contribute up to $19,000 to a 401(k), while those 50 and over get a $6,000 catch-up that raises that limit to $25,000. Beginning in 2020, 401(k) contribution limits are increasing. Workers under 50 will get to sock away up to $19,500, while those 50 and older will get to contribute up to $26,000.

If you're funding a traditional 401(k), as opposed to a Roth, that means you get protect up to $19,500 or $26,000 of your income from getting taxed in the coming year, and that's a very good thing. But while an increase in 401(k) contribution limits could easily end up benefiting a minority of Americans, for the typical worker, it won't matter at all.

How close are workers getting to maxing out their 401(k)s?

Although workers are generally advised to sock away anywhere from 15% to 20% of their annual earnings for retirement, most don't get even close to that threshold. Vanguard reports that in 2018, the average contribution rate for 401(k) plans was 6.9% of salary -- nowhere near 15% to 20%.  

Furthermore, the average U.S. salary in 2018 was $63,179, which means that the typical American put away $4,359 in a 401(k) that year. That's certainly not bad -- but it's also nowhere close to the maximum allowable annual contribution. As such, an increase of $500 for younger workers and $1,000 for older workers isn't likely to make much of a difference to the typical saver in 2020. Rather, it's the elite few who might actually get to capitalize on that increase.

Ramping up on savings

It may not be all that feasible to go from contributing $4,359 a year to a 401(k) to putting in $19,000 or more -- but that doesn't mean you can't try. Getting serious about cutting back on expenses could help you eke out a few extra thousand dollars in savings annually -- which could really make a difference over time.

Imagine you contribute $4,359 a year, on average, to a 401(k) over 30 years with investments that generate an average annual 7% return (which is just below the stock market's average). After three decades, you'll be sitting on about $412,000. But when that $4,359 a year increases by $2,400 due to more judicious spending on your part, your total 401(k) value increases to about $638,000, assuming that same savings window and return on investment.

The point, therefore, is that while the typical American doesn't come close to maxing out a 401(k), today's workers can still do a lot better on a whole. And the sooner you start making lifestyle changes that allow you to more aggressively fund your nest egg, the more financial security you'll buy yourself down the line.