I constantly get asked how I maximize my 401(k) contribution at $20,500 per year (between Traditional and Roth contributions combined), which is the 2022 limit set by the Internal Revenue Service (IRS), our favorite 3-letter agency at the Wealthy Idiots **SARCASM ALERT**. Keep reading and I’ll give you some tips on how to painlessly increase your retirement savings.
Slow and steady wins the race
I won’t lie, I prefer the “band-aid method” of increasing retirement savings. That means you just start dumping $20,500 a year into the ole 401(k) ASAP. Expenses? Ah, who cares. Just start saving, TODAY!
Clearly this isn’t always realistic. Which leaves us with the option of taking a gradual approach to increasing contributions. This can be accomplished in several different ways, and there is certainly no “one-size-fits-all” approach.
As you can see below, Bankrate conducted a survey which shows that American’s are doing a terrible job of savings in general. Try your best not to be in that crowd.
Put every pay raise toward the 401(k)
This is exactly how it sounds. If you receive a 5% pay raise, you should increase your 401(k) contribution by 5%. If you make $50,000 per year, this would be a $2,500 increase annually. Over a period of 30 years, this will make a huge difference in your retirement planning. Continue this process until the IRS limit is reached.
Supplement using other cashflow
Another way to trick your mind into saving more is by using an outside source of cash. Let’s say you just inherited $50,000. Clearly you shouldn’t blow through this money in 30 minutes, right? But instead, you could increase your 401(k) contributions to the IRS limit and supplement your paycheck using the $50,000. This would help defer taxes and get you in the habit of seeing less money in your paycheck. Win-win.
Re-allocate other money toward retirement
Do you have too many streaming services? What about meal deliveries? Addicted to eating out every day for lunch? By cutting some of these discretionary items, you can easily put more money toward retirement and save on taxes at the same time. Again, win-win.
What to do once you hit the limit
Eventually, you’ll be at the IRS limit. Heck, it may even occur faster than you think. Once this is the case, you’ll just need to keep up with the new limit each time the IRS announces one. This normally happens every year, but can sometimes occur once every two years.
You should also look into other retirement savings once you hit the max. This could be a Roth IRA, real estate, or starting your very own side hustle. Whatever you choose, you should continue saving. After all, what will you do with that money if you don’t?
Don’t forget these 4 rules of retirement savings
- Estimate how much you need.
- Make sure you’re getting your employer match. This is free money; Wealthy Idiots never miss out on free money.
- Find new ways to contribute toward retirement.
- Read Wealthy Idiots
If you can follow these 4 rules that I just made up about 23 seconds ago, you should be ready to sip a margarita on a beach in a few years!