Maxing out your 401(k) can go a long way toward improving your retirement preparedness. In 2023, you'll be allowed to set aside a record $22,500 ($30,000 if you're 50 or older). That could turn into hundreds of thousands of dollars after it's been invested for a couple of decades.
But let's be honest. Most of us can't spare $22,500 or anything close to that. But that doesn't mean you should give up on your 401(k) altogether. Try making this your new retirement savings goal instead.
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You may not have to save all on your own
Many employers offer a 401(k) match as a way to attract top talent and help ease the burden of saving for retirement. Your exact match depends on several factors, including your income, your personal contributions, and the company's matching formula. But in some cases, it could add up to thousands of dollars per year -- and that's before investing.
If you claimed a $2,000 match per year for 20 years and you earned an 8% average annual rate of return during that time, you'd wind up with over $95,000 just from employer-matched funds alone. And your actual balance would be much higher because you have to put some of your own money into your 401(k) to get the match in the first place.
Claiming your full 401(k) match every year can significantly increase your 401(k) balance, especially if you get a dollar-for-dollar match. Then, you're effectively doubling the amount you save each year and claiming a bonus from your job that you wouldn't otherwise get.
How to claim your full 401(k) match
Reach out to your company's HR department or your 401(k) plan administrator if you're unsure how its matching formula works. Dollar-for-dollar matches and $0.50-on-the-dollar matches are most common, and they're usually capped at a certain percentage of your income. For example, if you earn $50,000 per year and receive a dollar-for-dollar match on up to 3% of your income, you'd contribute $1,500, and your employer would contribute another $1,500 for a total of $3,000 that year.
Keep in mind that the amount you must contribute for your full match can change over time if you get a raise, or your company changes its matching formula. And remember, you don't have to stop once you've gotten your full match. If you're able to set aside extra cash, doing so will help build your nest egg faster.
New employees should be wary of their plan's vesting schedule, especially if they don't plan to remain with the company for long. Vesting schedules determine how long you must work for the company before you're allowed to keep your employer-matched funds. Quitting too soon could cause you to forfeit some or all of your match. So whenever possible, hang on until you're fully vested.
What if my 401(k) doesn't offer a match?
If your 401(k) doesn't offer a match, you'll have to set a different retirement goal for yourself. Perhaps you aim to set aside a certain percentage of your income this year or to increase your annual contributions by a certain dollar amount compared to last year. It's up to you to decide what works, but having a specific target in mind will help you monitor your progress over time.
You may also want to consider saving in a different account. Your 401(k) is still an option, but some charge high fees and give you few investment options. You may prefer an IRA instead. With one of these, you can invest how you want and choose when you pay taxes on your funds. But you may only contribute up to $6,500 in 2023 ($7,500 if you're 50 or older).
Whatever you do, make sure you set up automatic contributions to your retirement account. That way, you won't have to remember to make contributions manually. Regular contributions help build the habit and will keep you moving toward your goals.
