401(k) Contribution Limits 2017-2018: How much should I save? Plus the latest changes on tax reform

401(k) Contribution Limits 2017-2018: How much should I save? Plus the latest changes on tax reform
Find out if you’re saving enough. ShutterOK/Shutterstock.com
Find out if you’re saving enough. ShutterOK/Shutterstock.com

You know you should be saving money for old age. But how much is enough? That’s a tricky question, since the answer depends on several factors, from how old you are now — and how much money you make — to how long you plan to work before you retire. And the unexpected can foil even best laid plans: losing your job, moving to a more expensive city or even that amazing trip to Australia that plunged you into credit card debt.

Alas most Americans aren’t saving nearly enough — whether for retirement or, simply, emergencies. In fact, in a 2016 survey by GoBankingRates, 69% of Americans said they have less than $1,000 saved. To be fair, it’s tough to put away cash when you live paycheck to paycheck, as 78% of workers said they do either sometimes or always, in a 2017 survey by Career Builder.

Arguably, if you are putting away anything for retirement, you’re ahead of the game. And love it or hate it, one of the easiest ways to sock away money is to contribute to an employer-sponsored 401(k) — if you have one — because the money comes out of your paycheck before you even have a chance to miss it. (Don’t have a 401(k) at work? Check out our guide to opening an IRA.)

“Get started as early as possible so it becomes a habit, and you don’t even think about it,” said certified financial planner Travis Sollinger. As an added bonus, any money you contribute to your 401(k) reduces your taxable income for the year, dollar for dollar. Less cash handed to Uncle Sam? Sweet.

In case you needed even more encouragement, the IRS just announced the first increase in the maximum amount you can contribute to your 401(k) since 2015. Starting in 2018, the new contribution limit for employees under age 50 will be $18,500 — a $500 increase. That’s a huge number to hit, so don’t feel intimidated if it is out of reach for you: Just do your best to maximize your contributions within reason. It’s a valuable perk worth taking advantage of, especially if you can get an employer match.

That value was highlighted recently in news of GOP tax reform efforts — and potential items on the chopping block to help pay for cuts: Despite reports of proposals to cap tax-deferred retirement contributions to $2,400 a year, President Donald Trump said Monday that he had no plans to lower the limits.

Of course Trump has not always kept promises to the middle class before, so it it worth staying tuned on that front.

But in the meantime, how much money exactly should you be saving? If you’ve got less than $1,000 in your account, it might be hard to image stashing 18 times that amount in a single year — and that’s okay. What matters most is that you are setting something aside for retirement and hitting certain targets as you age. Of course, specifics help: Here are some rules of thumb to help you.

How much should I save by age 30?

By the time you’re 30, you’ve been probably working full-time for at least a few years and have hopefully paid off a good chunk of any student loan debt. According to Fidelity, you should ideally have saved away the equivalent of your current annual salary.

Of course, this may not be possible if you went to grad school and are just getting started in your career or if you are starting a family and all your money is going to caring for your newborn.

But that also doesn’t mean you should just throw up your hands up and give up. Contribute what you can, even if it’s just $50 a month — because you’ll need even more saved up as you get older.

How much should I save by age 50?

Don’t panic, but by the time you reach the big 5-0 Fidelity recommends that you have six times your current salary. That may sound like a lot, but if you started saving 10% of a $40,000 salary at age 25, got a 2% annual increase and a 5% employer match (for a total contribution amount of 15% of your annual salary), all while averaging a 6% annual return rate, you would have more than $342,000 by the time you’re 50.

That’s nearly nine times your starting salary and more than five times your final salary of about $65,600.

Want to save even more? Bump up your contribution percentage to 15%, and together with the employer match you could have more than $478,900 by age 50 — or approximately $136,000 more than if you contribute just 10%.

Can’t swing the 15% contribution from the get go? Gradually boost your percentage every couple years and you’ll still end up with tens of thousands more dollars saved for your golden years.

How much should I have in savings by retirement?

Assuming you’ll stop working at age 67, you’ll want to have stashed away ten times your annual income, assuming that you want to keep living at your pre-retirement lifestyle. The Fidelity calculation figures that you’ll live until age 92 and will receive Social Security benefits to supplement savings.

Putting that in dollar figures, that works out to about $920,000, assuming you keep getting that 2% raise throughout your working life and have a final salary of approximately $92,000 by age 67.

One caveat? By some calculations, you may need as much as $2.5 million by the time you retire. That’s a lot of money — and all the more reason to max out your 401(k). If you started saving the 2018 limit of $18,500 at age 25 for every year until you turned 50, you’d have more than a million dollars by age 50, and well over $3 million by the time you’re 67.

The good news: If you fell behind on your savings goals in your 20s, 30s and 40s, you can still put up to $6,000 in additional “catch-up contributions” away tax-deferred each year, once you turn 50 — for a total of $24,500 annually.

Need more specifics? Here’s the Payoff guide to how much you need saved at every age. Just remember, it’s never too early to start stashing cash.

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