How To Build Your 401K Account For Retirement

401k, Car Loans, Mortgage, Retirement, Saving

January 20, 2022

The IRS has increased the amount you can contribute to your 401k in 2022.

For anyone younger than 50, you can contribute up to $20,500 in 2022. If you are at least 50 years old, you are also eligible for a $6,500 “catch-up” contribution that brings the 2022 total allowable contribution to $27,000.

Okay, I am aware $20,500 or $27,000 is a serious amount of money that is way beyond what most of you could manage to save. In fact, a very small percentage of people who save in a 401k contribute the max each year.

What’s Your Savings Rate?

Let’s forget about the annual max, and concentrate on what is both practical, and necessary for you to build a solid 401k account for retirement.

If you are in your 20s, your goal should be for the combination of your contributions and any matching contribution to be at least 10% of your salary.

If you are in your 30s and just getting started, your annual savings rate goal should be 15%.

If you are older and haven’t saved much, I want you to also aim to get to 15% ASAP. And once you are at 15%, keep raising your savings rate as quickly as possible until you get to 20%, or you reach the annual max, or you carefully run a retirement calculator and are confident you are on track to meet your retirement goal.

How to Save More

Okay, so if you are below those target levels, let’s discuss how to up your 401k savings game. (For those of you with an unpaid credit card balance, I only want you to contribute enough to a 401k to qualify for the maximum employer matching contribution.  Then, once you get your credit card debt paid off, you can follow the advice that follows)

  • If your plan offers a Roth 401k use it. If there’s no Roth 401k, always contribute enough to your traditional 401k to get the maximum match. But after that, you might want to consider shifting the rest of your retirement savings for the year into building up savings in a Roth IRA, if you meet the income qualifying rules. In 2022, an individual with modified adjusted gross income below $129,000 and married couples filing a joint tax return with income below $204,000 can each contribute up to $6,000 to a Roth IRA. That limit rises to $7,000 for anyone at least 50 years old.
  • Boost your contribution rate for this year by 1 percentage point.Two percentage points is even better. Don’t tell me you can’t afford it. You can if you are willing to trim your spending
  • Boost your savings rate by 1 percentage point every year.That’s at a minimum. Even better is to boost it that much every six months.
  • Use half of every raise for retirement.When you get a 5% raise, immediately increase your contribution rate by 2.5 percentage points.
  • Use a Bonus to Fund a Roth IRA.When you get a one-off bonus, I would love it if you considered using all of it to save more for retirement in a Roth IRA, if you meet the income requirements (see above). 

Now with that said, I want anyone who is in their 40s and 50s and knows they are seriously behind on retirement savings, to try and save as much as possible. Might $20,500 or $27,000 be doable if you made retirement a priority? 

 I can think of a few ways to save a lot more:

  • Drive your car longer. The average new car loan payment is around $600 a month. For a used car the average is around $475 a month. Every year you can keep driving a car you have already paid off, is a year where you have a big chunk of monthly income you can divert to retirement. Instead of a $600 car loan payment, how about $600 more into your 401k? That’s $7,200 more a year!
  • Buy the smaller house.Bigger is not better. Period. The bigger the house the higher the mortgage, property tax, and utility costs. For those of you who are looking to buy in the coming years, the goal should be to spend the least amount to meet your needs. Do that, and you will have hundreds of dollars more each month to use for other financial goals.
  • Sell the too-big house.I am talking to my friends who are in their late 50s or early 60s and know their retirement savings is not where they really want (or need) it to be. I know many of you think you will downsize when you retire. I am here to tell you to do it now. Who knows if the real estate market will be as strong as it is now? For those of you who can sell now and move to a smaller home (and possibly a less expensive area), that likely means you will pocket a nice gain to add to your retirement savings. But you will also reduce your annual housing costs (lower property tax, lower utility bills) and that will make it possible to save more each year for retirement.

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