If you have access to a 401(k) plan through your employer, then you have a prime opportunity to save for retirement. That's because 401(k)s come with much higher contribution limits than IRAs and there's also the potential for employer matching dollars to boost your balance.
In fact, if you were to max out your 401(k) for even a single year, you'd be doing a lot to build a solid nest egg. And if your goal is to hit that max in 2020, here's how to go about it.
1. Know your annual contribution limits
The amount of money you're allowed to put into a 401(k) changes from year to year. In 2020, you can contribute up to $19,500 if you're under the age of 50. If you're 50 or older, you get a $6,500 catch-up provision that raises your total allowable contribution to $26,000.
Keep in mind that funds contributed by your employer don't count toward these limits. If you're 52 and get $3,000 in matching dollars from the company you work for, you can still put in your full $26,000.
2. Get on a strict budget
The money that goes into your 401(k) will need to come from somewhere, and if you're willing to cut back on living expenses and live frugally, then you just might manage to max out this year. Take a look at your budget and see where there's room to spend less on big expenses. You might decide to live in a cheaper apartment for a year to save yourself $500 a month on rent or not to renew your auto lease and deal with public transportation for a while to free up additional cash.
Cooking all of your meals at home could also go a long way toward freeing up money for your 401(k). Imagine you typically buy lunch daily at $10 a pop and order takeout three nights a week for $20 per meal. Based on the typical restaurant markup, you could save yourself about $80 a week by preparing all of these meals in your own kitchen. Do so for 50 weeks and you'll be sitting on $4,000 for your 401(k).
3. Boost your income with a side hustle
If you're a higher earner who lives modestly, then you may not need a second job to max out your 401(k). But if you don't earn a ton of money and your attempts to cut back on spending only get you so far, then a side hustle could be your ticket to maxing out this year.
Imagine you're able to boost your income by $200 a week via a second gig. In the course of a year, that's $10,000 -- more than half of what you need to max out if you're under 50.
4. Allocate bonus cash to retirement savings
Chances are, you'll come into money during the year outside of your regular paycheck. You may get a tax refund after filing your return, a bonus from your employer for a job well done, or even a generous cash gift from a relative to celebrate an upcoming birthday. If you take all of that money and put it directly into your 401(k), that could spell the difference between maxing out and falling just a bit short.
It pays to max out your 401(k)
Maxing out your 401(k) for years on end will no doubt set you up for a financially solid retirement. But even if you don't manage to do that -- say you buy a house in a few years that takes up a lot more of your income or you have children who add to your bills -- maxing out a 401(k) for even a single year could have a huge long-term impact.
If you were to sock away $19,500 this year in your 401(k) at age 27, invest that money at an average annual 7% return (which is doable when you load up on stocks), and then do nothing but sit back and watch it grow for 40 years, you'd wind up with up $292,000 in retirement savings, assuming you don't manage to add a dollar more in your lifetime. That alone is pretty impressive.
As such, it pays to push yourself to max out your 401(k) this year. And who knows? If you succeed in 2020, you might find a way to do the same in future years, too.