A 401K is a retirement savings
plan sponsored by your employer that allows you to contribute part of your
paycheck towards your retirement before taxes are taken
out. Contributions into your 401K lower your adjusted gross income,
which may lower your tax liability.
I just hit a new milestone in my
401K: my investments have surpassed 300K in value!
I started contributing into my
401K a little over 8 years ago in October
2011 with a 3% contribution
from my paycheck. When I first started
contributing to my 401K, I couldn’t imagine it ever being possible to max out
my contributions to $17,500 (the limit back then).
I increased my contributions over
time, just 1% every few months. Slight
increases in my contributions made it easier to adjust to slightly decreased
paychecks. Salary increases also helped
make increased contributions and lifestyle adjustments easier. By June 2014, I was finally able to max out my
During the last 8 years, the
market has gone up and it has gone down.
I continued to make contributions with each paycheck. When the stock market declined, I picked up
more shares of my index funds. When the
market reached new highs, I picked up less shares.
Time in the market is much more
important than timing the market. Investing in a 401K consistently
puts money into your account with each paycheck, whether the market is up or
down. You’ll end up fine even if you only invest at
market peaks, as long as you stay the course with your investments and not
panic when the stock market has a crash or correction.
If your employer offers a 401K, I
highly recommend contributing to it. It’s the best way to
consistently invest on autopilot. And since your contributions are
taken out of your paycheck directly, you won’t miss the money when you get
paid. If your company offers a match, definitely contribute up to
it. Saying no to a 401K match is turning away free
money. Match contributions from your company do NOT count towards
your maximum individual contribution amount.
My 401K is 90% invested
in 3 funds designed to mimic VTSAX, the Vanguard Total Stock Market (71%
S&P Fund, 6% Vanguard Mid Cap, 13% Vanguard Small Cap Growth) as well
as 10% into a Vanguard Health Care index.
Starting next year in 2020, the maximum
contribution for 401K will be $19,500 (for those ages 50 and over, the
additional "catch-up" contribution limit will rise to $6,500). I’m looking forward to the increased
limits. If you are not currently maxing
out your 401K, try to increase your contributions. Even 1% increases can make a huge difference
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