The Maximum 401k Contribution Limit

The maximum 401k contribution limit for 2021 is $19,500. The maximum 401k contribution limit goes up to a record $20,500 for 2022. In 2019, the maximum 401k contribution limit was $19,000.

Given the historical maximum 401k contribution limit tends to go up $500 every two or three years, we should continue to see 401k contribution limit increases going forward. Inflationary pressures are the main reasons for continued contribution limits. For example, the Social Security Administration raised its cost-of-living-adjustment in 2022 by an impressive 5.9% to account for inflation.

If you are 50 or older, you can add up to $6,500 extra per year from $5,500. This is the government’s way of allowing older workers with typically higher incomes to catch up.

Always Max Out Your 401k

I always recommend trying to max out your 401k as fast as you can. Once you get into a max habit you’ll rack up some big bucks in no time.

Maxing out your 401k is a learned habit that gets easier over time. Given the contributions are pre-tax, you won’t feel as much pain compared to saving with after-tax dollars.

So many people don’t even bother to try maxing out their 401k because they don’t feel like it’s possible. But once they try, they kick themselves for wondering why they didn’t max out their 401k sooner.

Remember, the maximum 401k contribution limit is $19,500. Therefore, using an effective 25% tax rate, the contribution is more like contributing $14,625 after-tax.

Below is a simple chart to see how much you can accumulate in your 401k by age or years worked if you contribute $18,000 a year starting today.

The chart is obviously more helpful for younger folks, given older folks had lower maximum contribution limits in the past. For example, when I first started maxing out my 401k in 2000, the historical 401(k) contribution limit was only $10,500.

I’ve also included my high-end 401k target amount by age based off continued maximum contributions plus a constant 4-8% annual return. My high-end 401k savings target can also be considered your overall total savings target, which includes after tax savings as well.

The numbers are for “ideal” conditions. We all know that life, recessions, and buying things we don’t need get in the way of savings and returns all the time.

What You Could Have In Your 401(k) If You Max It Out Going Forward

Here’s what you could have in your 401k if you contributed $19,000 a year for 38 years. You will end up with at least $722,000 and most likely over $1,000,000 by the time you reach 60.

The Maximum 401k Contribution Limit: What You Could Have If You Max Out Every Year

Having $722,000 at least by age 60 doesn’t sound too shabby to me. The numbers don’t take into account any positive returns or employer match either.

Given the stock market has provided a historical 6-8% annual return, everyone who maxes out their 401k every year could have well over $1 million by the traditional retirement age if you look at my column on the right.

Unfortunately, in 38 years it will probably take $6 million or more to replicate the wealth of $1 million dollars today! Good thing the maximum 401k contribution limit will probably continue to go up every two or three years. We could be looking at a $50,000 annual max contribution limit by the year 2044.

You’ll notice that starting at 35-40 years old, my high-end total savings target really starts to rocket higher because you’ve been able to amass a nice financial nut. Once you get to at least $250,000, your investment returns may start surpassing your contributions. That’s an amazing feel.

For example, a 8% return on a $400,000 portfolio = $32,000. If you add on a $18,000 contribution, you’ve just increased your 401K by $50,000! Market returns start providing the large majority of the gains, which is why you should really focus on asset allocation to protect yourself from downturns.

What You Could Have In Your 401k With A Bigger Contribution And 8% Annual Returns

Given the maximum 401k contribution limit is $20,500 in 2022, here’s another chart that shows how much you could have in your 401k over time. In the right column, I’ve assumed an 8% compound return.

As a result, you could end up with close to $5 million by age 60. But given the maximum 401k contribution limit will increase over time, you will likely end up with even more money!

Maximum contribution limit and what you could have

Tips For Maxing Out Your 401(k)

1) Remind yourself a 401k is only one leg of the retirement stool that is already broken. 

The other two legs of the retirement stool are a pension and Social Security. According to the Bureau of Labor Statistics about 22% of full-time private industry workers have a defined pension benefit compared to 42% in 1990.

Although most public sector employees still get pensions, public sector employees account for only around 10% of the population. In other words, most people don’t have pensions anymore.

As for Social Security, the realistic calculation is that we will still all receive Social Security checks in our mid-60s, but at 70% of what is promised if nothing is done.

Given most people don’t have pensions and Social Security won’t be paid in full, the 401k is the baseline defense for retirement. Thus, we must build upon our after-tax investments and alternative income streams to develop financial buffers for maximum financial security.

The new three-legged retirement stool consists of You, You, and You. Mentally forget about Social Security or a pension taking care of you in retirement. If you can get either, consider yourself blessed.

2) Calculate a budget based on a reduced gross income equal to the maximum 401(k) contribution limit

Nobody really sits down and writes out their expenses. We’re either afraid or lazy for some reason, yet we can spend hours doing research on our next big screen TV or laptop.

But for your own sake, take your current income, subtract $19,500, and multiply it by one minus your effective tax rate to calculate your disposable income e.g. $100,000 – $19,500 = $81,500 X (1-25%) = $61,125 after taxes and 401k max.

Divide the annual income by 12 to get a monthly disposable income figure and work your budget from there. The bigger the buffer you can have from spending all your disposable income, the better. Making your contributions automatic will make savings so much easier.

Related: I Could Have Been A 401k Millionaire By 40 If I Stayed At My Job

3) Envision your 65-year-old self greeting customers at Walmart.

The biggest inspiration I get for saving and paying down debt is when I see senior citizens working minimum wage jobs. I admire them dearly for working, and I’m also scared straight into saving more because I don’t want to be them someday.

I want to be relaxing on a beach with a Mai Tai or eating an eggs Benedict with a mimosa on my private cruise ship balcony in the Mediterranean. The more we can envision ourselves in poverty, the more motivated we’ll be to, at the very least, max out our 401k.

Once you start contributing like a champ to your 401k, run your 401k through a free 401k fee analyzer to see how much in fees you are paying. I discovered I was paying a whopping $1,700 in annual 401k fees I had no idea I was paying!

I quickly sold out of a couple actively managed mutual funds that weren’t performing great and into some low-cost alternatives. Remember, the more you have, the more they will want to make off you. Now I’m only paying about $600 a year in fees on a ~$400,000 portfolio.

401k savings targets by age

4) Think About Your Legacy In Retirement

You either plan to spend all your money before you die (YOLO Retirement Legacy) or you plan to create a perpetual giving machine after you die (Legacy Retirement Philosophy). There is no right or wrong retirement philosophy to choose from.

However, if you plan to do good after death, then you will be more motivated to max out your 401(k) and build as many passive income streams as possible. This way, you can ensure your legacy lasts long after you are gone.

Personally, I would like to leave enough money for two charities that will given them money from my estate for 100 years after I’m gone! Wanting to leave a legacy is partly why I’ve been writing on Financial Samurai since 2009 as well.

Take advantage of the maximum 401k contribution limit every year. You won’t regret your contributions 10 years from now.

X-Ray Your 401k For Excessive Fees

One of the best way to become financially independent is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money.

The best feature is their free 401k Fee Analyzer, which runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,748 a year in portfolio fees I had no idea I was hemorrhaging!

There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.

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Diversify Your Investments Into Real Estate

Maxing out your 401k mostly into stocks is a solid way to build wealth. However, stocks are volatile compared to real estate. Therefore, if you want to dampen volatility and build wealth at the same time, invest in real estate. Real estate is my favorite asset class to build wealth.

The combination of rising rents and rising capital values is a very powerful wealth-builder. By the time I was 30, I had bought two properties in San Francisco and one property in Lake Tahoe. These properties now generate a significant amount of mostly passive income.

Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore. 

Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the easiest way to gain real estate exposure. 

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio. 

I’ve personally invested $810,000 in real estate crowdfunding to diversify my investments and earn income 100% passively. There is a permanent trend towards relocating to lower-cost areas of the country.

The Maximum 401k Contribution Limit is a Financial Samurai original post that gets updated yearly. For more nuanced financial information, subscribe to my free weekly newsletter.

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