So when I embarked on this blog, I was hoping to write about everything I am passionate about and finance is included in that list. Recently a friend texted me asking “You said you maxed out your 401K, what does that mean?”
If you work for a traditional employer like I do, more than likely you have an employer sponsored 401K plan and hopefully your employer is matching a certain percentage of your income. I am a huge proponent of 401K plans. I don’t really understand when people make excuses about not being able to participate especially when there is an employer match, that’s like someone throwing money at you and you saying “No, I’m good.” If you have a 401K plan and are not at least participating enough to receive the full match, you may need to reevaluate your budget. I know every situation is different but I participated when I was living with the tightest budget I have ever had to live with. I went a full year without buying myself anything other than the necessities. I lived on a TIGHT budget and still managed to save $10,000 in my 401K that year. So in my mind where there is a will there is a way.
Back to my friend’s question, maxing out your 401K means contributing $18,000 a year or $1,500 a month. It’s a substantial amount of money and that’s why I wrote about it. I am damn proud of that number. The maximum number changes regularly and it is set by the IRS (www.irs.gov). The added benefit to saving for your own retirement through a 401K plan is that the dollars are coming out before taxes. So when you are taxed the government is actually taxing a lower amount than you truly made and you are lowering your adjusted gross income (AGI) for tax time.
If you are fortunate enough to have excess income after maxing out your 401K, I would recommend an IRA which you can read more about here: https://www.irs.gov/Retirement-Plans/Individual-Retirement-Arrangements-(IRAs)-1. Which is also a great way to reduce your AGI and tax liability.
The main reason I am continuing to work while my babies are small is retirement. I have a goal to retire at 55 and am doing everything in my power to make that happen only 20 more years of work left!