86% of 401(k) savers missed this great opportunity in 2021


JThe advantage of 401(k) plans is that they come with higher annual contribution limits than IRAs. But new data reveals that most savers are not taking advantage.

In 2021, only 14% of 401(k) plan participants maxed out their contributions for the year, according to recent data from Vanguard. This meant investing $19,500 for those under 50 or $26,000 for those 50 and over. But it also means that the majority of savers have not maximize their retirement savings. And it’s a decision they might regret down the line.

It pays to maximize

Reaching the annual 401(k) plan contribution limit is no small feat. But it pays to push yourself to the max or get as close to it as possible.

Image source: Getty Images.

Once you retire, you don’t want to depend too much on Social Security. Indeed, these benefits will only replace about 40% of your pre-retirement income, assuming you earn an average income. If you have an above-average income, you can expect these benefits to provide you with even less replacement income.

Additionally, cuts to Social Security are currently on the table due to an expected fiscal shortfall. If benefits are greatly reduced, they will provide even less replacement income.

So how much replacement income should you expect to need? While there are always exceptions, it’s a good idea to assume that you’ll need 70-80% of your old salary to live comfortably after your career is over.

This assumes you want to maintain much of the same standard of living. If you’re planning on downsizing your home and downgrading your lifestyle, then sure, you might be able to get by with less. But for the most part, you shouldn’t plan to retire on Social Security alone, so you’ll need a solid nest egg to ensure you can live comfortably as a senior.

Also, if you have ambitious retirement goals, like traveling a lot or living in a big city and enjoying its nightlife frequently, you may need to commit to maxing out your 401(k), at least for a while. . possible. Similarly, if you are well into your career and behind on your savings (i.e. you are 45 with a balance of $7,000), maxing out is also a smart bet.

How to increase your savings rate

Maximizing a 401(k) plan isn’t easy. In fact, Vanguard specifically found that those who maxed out their contributions in 2021 tended to be older and have higher incomes. And let’s face it – it’s easier to max out a 401(k) when you’re making $250,000 a year than when you’re making $100,000.

But if you want to prepare for a retirement without financial worries, it could be advantageous to try to maximize your capital, or if not, at least increase your savings rate. To do this, you may need to take steps such as reducing non-essential expenses or increasing your income with a side job (an option that, thankfully, has become increasingly flexible over the years). But if that’s what it takes to secure your dream retirement, it will be worth it.

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