Question: What is the 401k maximum contribution I can make? Is it a good idea to make the maximum contribution allowed?
Answer: The maximum amount that you are able to contribute to your 401k account should be easily provided to you by your employer, and should have been discussed during your initial introduction to the program.
One of your first decisions when you sign up for a 401k program will be how much you plan to contribute to your account on a regular basis, whether it’s the maximum percentage of your income or some lower amount that fits within your budget.
"Without frugality none can be rich,
and with it very few would be poor.”
- Samuel Johnson |
It is important to make your 401k retirement funds a priority, but not at the expense of your needs in the present. A balance must be struck between your current needs and your future needs in order to make this important retirement planning decision.
The first thing you should do is to complete a full personal financial statement. Based on this information you’ll have all you need to plan a realistic household budget.
After you’ve assessed your personal finances, find out what percentage your employer has set as the maximum allowable contribution to your 401k plan. This number may vary if the 401k tax rules change or if your employer changes the plan, so be sure to stay alert to any changes.
Take stock of your current financial situation and make sure you know where you stand. Are you already spending beyond your income? Can you afford the drop in your available income that will result from making the 401k maximum contribution?
If you cannot confidently manage the reduction in your available funds, reduce the percentage of the planned contribution to a more reasonable amount. Typically, you can change your contribution percentage multiple times within the year.
The main thing to remember is that your contribution to your 401k should be an amount that you can comfortably afford. You won’t be coming out ahead if you go into debt now in order to save for retirement.
Use this free household budget calculator to ensure you have a firm grasp of all monies coming in and going out.
If you plan on making the 401k maximum contribution this must not cause you to limit your ability to save in other important areas. You should still allow some room in your budget for other savings initiatives.
Keep in mind, your 401k is a long-term investment and you should not withdraw anything from the plan until you reach retirement age. You shouldn’t count on using these funds for any expenses between now and retirement. For instance, you should not use these funds to make a down payment on a house or for your children’s college tuition.
Money market accounts, short-term certificates of deposits, liquid mutual funds and other short-term investment accounts are better savings options if you will need access to your money for purchases in the near future.
Certainly, if you are confident that you will be able to handle the payroll deduction without knocking your budget out of balance, then by all means make the 401k maximum contribution – the earlier you start and the more you can save now, the more money you’ll have available to fund your retirement years.
In conclusion, remember this money saving 401k advice: Saving now allows you to leverage the power of compound interest! So go ahead and make the maximum contribution to your 401k plan if you can do so, but only if you can afford it.
For more great information about planning for your future, download our free tool Money Matters in Retirement.
"One way to solve the traffic problems of this country
is to pass a law that only paid-for cars
be allowed to use the highways.”
- Will Rogers |
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Debt is NOT your friend. It's not a wonderful "tool" for building wealth. That's a myth.
