Saving for retirement is essential. If you don't build yourself a solid nest egg, you might struggle financially once you stop working and the paycheck you once relied on ceases to hit your bank account.
And if you think you're set to retire on Social Security alone, think again. Those benefits will only replace about 40% of your pre-retirement income if you're an average earner, and most seniors need roughly twice that much money to live comfortably.
That's where your personal savings come in, and if you have the option to contribute to a 401(k) plan through your employer, it pays to do so. One advantage 401(k)s have over IRAs is that employers often put matching dollars into them. The result? Free retirement money for you.
Another benefit of saving for retirement in a 401(k) is being privy to a much higher annual contribution limit than what IRAs allow. Right now, 401(k)s max out at $20,500 per year for savers under age 50 and $27,000 for those 50 and over. Meanwhile, the maximum you can contribute to an IRA this year is $6,000 if you're under 50, or $7,000 if you're 50 or older.
But the IRS just announced even higher contribution limits for 401(k)s in 2023. And that means you have an opportunity to sock away even more money for retirement.
You can save even more next year
Next year, 401(k) savers who are under 50 will be allowed to contribute up to $22,500 to these accounts. That's a $2,000 bump from 2022, and the largest increase the IRS has allowed in years.
Meanwhile, workers age 50 and over are entitled to make catch-up contributions to a 401(k). Right now, those max out at $6,500. Come next year, older workers will be able to make a $7,500 catch-up. So all told, those 50 and over will have the option to contribute up to $30,000 to their 401(k)s in 2023.
Here's some more good news. If your employer offers a 401(k) match, it doesn't count toward your personal annual contribution limit. So, let's say your employer will match up to 100% of your first $3,000 in contributions. If you're 52 years old, that means you can conceivably add $33,000 to your 401(k) plan in 2023.
It pays to max out, or get as close as possible
The more money you're able to pump into your 401(k), the more financial security you might buy yourself in retirement. Now the reality is that many savers have had to cut back on 401(k) contributions because of inflation. But if you're able to max out in 2023, or even just increase your savings rate, you'll be doing your part to avoid money woes down the line.
If you're convinced you're already putting as much money into your 401(k) as you can, here's one tip — bank any raise that's set to take effect at the start of 2023. Since it's money you're not used to spending at present, if you send it directly into your 401(k), you shouldn't really end up missing it at all.
The $18,984 Social Security bonus most retirees completely overlook
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