Estimated reading time: 7 minutes

Ah, the infamous 401(k)! If your employer offers a 401(k) as a retirement savings vehicle, you should ALWAYS take advantage. Thanks to the 401(k) contribution increase that took place in 2020 (there was no change in 2021), investing in your company 401(k) is even more lucrative.

If your intention is to increase your savings, that’s a worthy goal. BUT don’t be short-sighted in your saving strategies. Are you looking at the long-term picture too? By that, I mean: are you contributing to your employer-sponsored 401(k) retirement plan?

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Here’s why you MUST participate in a 401(k), all thanks to the contribution increase that took place in 2020!

Why You Should Participate in a 401(k)

If I’ve said it once, I’ve said it a thousand times: an employer-sponsored 401(k) with a match is FREE MONEY! Do not pass go! Collect your dollars by participating in this option.

Now, many financial gurus will suggest you should first start an emergency fund, then pay down all your debt before you even BEGIN to consider investing. I say the one exception to this advice is when your employer offers a 401(k) plan with a match.

Most years, the IRS has offered a steady increase in the contribution limits (depending on the economy and other factors). Because these 401(k) contribution limits increased last year, it’s a particularly good time to reconsider your participation now.

The New 401(k) Contribution Increases for 2020

The IRS released a notification on November 6, 2019, that the amount you could contribute annually into your 401(k) was increasing to $19,500. These contribution limits also applied to 403(b), government Thrift Savings, and most 457 (government) retirement plans. On the latter, check with your retirement plan administrator to see if this applies to you.

So, with those pre-tax funds increasing to $19,500 in 2020 (again, no change in 2021), versus the previous maximum 401(k) contribution amount of $19,000, there is an added benefit to your participation. $500 might not seem like much, but in the long run, it will add up quickly.

If you’re already maxing out your 401(k) contributions, all the better! The 401(k) contribution increase gives you an automatic savings increase without lifting a finger. (Well, you’ll need to either notify your 401(k) administrator that you want to increase your current contribution amount for 2021, or go online and do it yourself).

Company Match or No Match

What if your company has a 401(k) available (or another one of the retirement account options listed above) that you could contribute to, BUT you haven’t made the jump yet? Well, first, see my recommendation above: always contribute to your 401(k) up to the company match!

If your company matches 4% of your 401(k) contribution, then you should contribute (at least) 4%. You don’t want to miss out on free money! And when your company offers a match, that’s precisely  what it is!

So what should you do if, unfortunately, there isn’t a company match? Well, a 401(k) is still a great way to put away money for retirement. Your contribution is automatically deducted from your paycheck, pre-tax. You don’t need to worry about taxes until the days when you leave the workforce and start taking distributions on your account. You can invest that money now and build it up with all that interest.

Even if your company doesn’t offer a match, consider starting with a 3%-5% portion of your income. This is an excellent place to begin. It’s enough to see significant progress toward your retirement savings, but it’s not so much that you will miss it from your paycheck!

Is a $500 401(k) Contribution Increase Really that Significant?

Back to the 2020 401(k) contribution increase. I know, I know, it’s only a $500 annual increase. It doesn’t sound like such a big deal, but let me tell you—over time, that $500 will add up.

The maximum contribution has steadily increased by $500 (every year) since 2017.  Although a $500 increase may not seem substantial, it really is  when that increase has happened year-after-year.

Another way to look at it is this:  During 2015 – 2017, the maximum 401(k) contribution stayed stagnant at $18,000.  Since the 2020 and 2021 401(k) maximum contribution is $19,500, you can see how that annual increase ultimately benefits you.

If you’re an aggressive investor who goes all-in OR if you have a significant amount of time before you face retirement, you’ll see substantial gains with that little $500. You decide your risk tolerance and your time frame and then work from there.

Are you the type of person who likes to track your investments daily? Consider taking a much smaller amount or percentage (from your overall pre-tax contribution) that you’re comfortable contributing to your retirement account. Divide that smaller amount out over 2021 but allocate it into one specific fund within your retirement account. You’ll see just how the market works within 12 months, and it just might entice you to increase the percentage of your contribution the following year. It can be a wild-ride depending on how you react to the market on any given day—especially when it’s not such a great trading day, but you might love the experience.

Now, obviously, I don’t recommend having your entire retirement account in just one account, you should allocate your funds appropriately based on your risk tolerance and timeframe on retiring. Furthermore, your retirement account should be actively monitored by you, reviewed by a professional, and rebalanced annually if necessary (it only takes about 15 minutes to check your retirement health regularly).

Plan Today and Be Prepared for Tomorrow

Familiarize yourself with the retirement and savings options out there. It certainly doesn’t hurt to know all your choices, no matter where you are in your retirement savings (or career life). Fidelity Investments just released its quarterly analysis of more than 30 million 401(k) and 403(b) retirement accounts. The average 401(k) balance is $129,300, in the second quarter of 2021, up 24 percent from the same period a year ago. The average 403(b) account balance increased to a record $113,300, also up 24 percent. The average IRA balance was $134,900, a 21 percent jump over the same period in 2020.

For a more exact calculation, use a retirement planning calculator to help you pinpoint precisely what you will need to tuck away to live comfortably and enjoy the good life in your later years. These tools can help you plan and measure how conservative or aggressive you can afford to be with your retirement funds.

You should know the limits for individual retirement accounts as well. In 2021 you will be able to save up to $6,000 in your IRA, up from $5,500 in 2018. Again, only $500 more annually, but it really does add up.

You can save for retirement using both an IRA and a 401(k), so be sure you understand the difference and know the maximum contributions for both retirement planning options. You have plenty of ways you can save for retirement!

Now, if you are 50 and over (like yours truly) and looking to make up for lost time, catch-up contribution limits also increased. For 401(k) and other employer-sponsored retirement plans, you can put in an additional $6,500 in 2021. For IRAs, you can put in an additional $1,000.

If you’re age 50 or older, and you want to maximize your contributions; check these numbers out:

  • $19,500    2021 401(k) Maximum Contribution Limit
  • $6,500      401(k) Catch-up Contribution (if you’re age 50 or older)
  • $6,000      2021 IRA Maximum Contribution Limit
  • $1,000      IRA Catch-up Contribution (if you’re age 50 or older)

By utilizing these tax-advantaged accounts for 2021, you are investing $33,000, which can help you feel more confident about a secure future.  

Saving for retirement may not sound sexy or fun, but with free money and the 401(k) contribution increase, you have to admit it’s a little exciting! Don’t wait to invest. Saving for retirement is the new black in 2021, to get YOU in the black for your retirement!

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