There’s an upper limit on an employee’s annual contribution to a 401K, an upper limit on the annual total (employee+employer) contribution to a 401K, and an upper limit on the total contributions made to certain group of retirement plans. But I’m not aware of a lifetime total contribution limit (except that nobody lives for ever, so can’t contribute forever). Here’s what the IRS says about 401K contribution limits, and it’s all about annual limits:
Can you point to a cite for any sort of lifetime total contribution limit?
Thanks for mentioning this here. I filed my tax returns, and had forgotten that I could do this. So I just transferred some money from savings to my IRA and filed an amended return. We’ll be getting an additional $720 back!
If you’re near the North Shore of Boston any time soon, let me know and I’ll buy you a drink!
Good to hear my post actually helped someone. Thanks for the offer of a drink, but the proper thing to do is invest that $720. I’m about as far away from Boston as I can be.
Yeah, practically speaking, it would be difficult for someone to put more than, say, $900,000 into a 401k over the course of their lifetime. That would be assuming they max out the 401k every year that they work, and they work a good long 40+ year career.
And that 401k might be worth something like $6 million, optimistically, by the time such a person retires.
Mine did not drop by half, but it did drop. Without checking to be sure, I think it may have been 20%. But in general, yeah, I suspect everyone’s 401(k) took a hit that year, and rebounded decently since then, unless it’s all in T-bills or something.
The percentage It would depend on how your investments are allocated - if you have a larger percentage in higher-risk investments, or your mutual funds happen to be invested in ones that took a bigger hit, then sure, a bigger drop is quite possible.
From mid-February to mid-March 2020, the S&P 500 dropped about 32%. Five months later, it was back up to its pre-crash price, and went up from there. I’m curious as to what your 401K was invested in that it ended up losing half of its value.
Anyway, as others have pointed out, the performance of one’s investments depends what one is invested in. If you had all of your money in a bond fund like VBTLX, then your nest egg coasted through the pandemic like nothing ever happened (and now that equities are soaring, bond funds aren’t so popular and their prices are sagging). As I mentioned above though, even though there was a crash in equities in 2020, it was short-term: the market has recovered and is now doing very well (I assume your 401K recovered in similar fashion). A risk-averse investor who puts their nest egg entirely in bonds throughout their career will weather transient downturns very nicely, but they won’t see their nest egg grow very much over the long haul. If you want your money to truly grow, you need to put a large portion of your wealth in the equities market and just be tolerant of the transient ups and downs. The transition to a bond-heavy portfolio shouldn’t happen until you get close to retirement, when you need your nest egg to be more stable.
Absolutely correct. And even with that disastrous month, the S&P 500 still was up over 16% for the entire year of 2020. It was up almost 27% in 2021, dropped 19% in 2022, then was up over 24% in 2023.
I retired at the end of 2016. Since then, through last Friday, the index is up 128%.
Man I am so sorry that you’ve had such terrible advice. 401k’s and Roth IRA’s are the absolute best ways to save for retirement in the future. If your company’s investment options keep going down over time to a $0 balance, there is something really wrong there. You should have control over how you invest your money and there should be some Index funds that have done really well over the past 25 years or so that you’ve been working.
There have been some bad years here and there (2008 and 2022 were my worst years) but overall my average return on my 401k account is over 10%. My company offers a match if we invest up to 7% which is quite generous I know. If your company offers a match and you are not taking advantage of it, you’re flushing part of your income down the toilet.
It’s too bad you have missed so many potential years of investing, but if you “do well” at work you should be able to start putting away 10% of your earnings, hopefully get some match, and end up at the very least supplementing your social security with extra income if you retire at 70. Just to throw out some numbers, let’s see you make on average 100k over the next 20 years. (assuming you’re about 50) Also going to assume you can get some kind of match from your company up to 3%, so your total savings is $13k per year.
If you’re about 50 and can do this over the next 20 years, you’ll end up with $775k in your account assuming 10% return. That would be a much better nest egg than nothing and just relying on social security. You could draw from that $50k a year or so, easy.
Indeed, but again, just for the OP, that $50k by the year 2045 or so would probably be worth only $20k in today’s dollars. Which is still a lot better than nothing, but not at all as comfortable as $50k in today’s money.
Well since you’d already be 70, you can probably draw down a little more as long as you don’t live past 95 or so. Keep your money invested in the market and draw $80k. Inflation would have to be pretty bad to make that worth so little, we’ve just gone through an inflation boom and I think it will level out for a while now. But true, your money will be worth less in 20 years, but I’d guess a milder inflation, and $80k would probably feel like $55k.
I really don’t know why retirees are advised to move their money to more conservative funds. I guess if they don’t have the buffer to roll with some market downturns, they might need to do that, but I intend to keep my money invested aggressively until I die. Then I can draw 6-7% of my nest egg each year instead of the recommended 4%.
If your financial entity is like mine, you can put your contribution into more than one fund. I’ve always split it between 3 or 4 funds with different risk levels.
The money market fund was originally there because it was the only option available while I was a “temp”. Then there were a few years when everything else was tanking and the money market fund just kept ticking along at a guaranteed 4% for the rest of its five-year contract. Over that time, I became fond of it. So I always kept a portion of my going to it. Not a big portion, but some.
There are “target date” mutual funds which are designed to do just that; if your target date is, say, 2050, it’ll be a lot more stock heavy. For target date 2024, it’ll be more bond / treasury heavy.
I ran a report in Quicken to see in what years our retirement accounts had taken hits. Q3 2015, about a 20-25% hit since Q2. It was Q4 2016 before it fully recovered. Q1 2018, about a 10% hit, recovered by Q3 2018. Q1 2020 about a 15% hit, fully recovered by Q1 2021. Drops the first 3 quarters of 2022 for a net of about 25%. Creeping up after that, finally fully recovered by Q4 2023.
Before that, the biggest dip would have been late 2008; I don’t have enough details prior to that.
It would be interesting to look at the price history of various target-date funds, during some of those downturns. I would expect that target date 2050 would show more volatility than target date 2024, for example.
The buffer of which you speak would be a very conservative money market fund. The most important thing about investing is diversification, which gets more important the closer you get to retirement. If the market crashes, you might find yourself taking 10% or more of your nest egg to live on. With a more balanced portfolio, you can take money out of high performing investments in good times and more conservative ones in bad times to allow your aggressive ones more time to recover. Aggressive means big losses are possible as well as big gains. The way to go at 30, when you can dollar cost average and do well during down turns, but not at 70. Or at least not for your whole portfolio.
That makes a lot of sense, thank you. I guess I’ll put 15-20% of my nest egg in bonds or maybe a high-yield savings account. Then I’ll pull from that in a bad year and wait for my market investments to recover. Very smart strategy.
It starts with very simple scenarios that a beginner investor use to understand the fundamentals of investing, and eventually gets you to a place where you can appreciate how asset allocation and annual portfolio rebalancing work to get you the desired balance of risk and return. The annual rebalancing is something similar to what you mentioned: you choose what percent of your portfolio to invest in equities and what percent to invest in bonds, and once a year, you see which asset type (stocks or bonds) has skewed above its target portfolio percentage, sell off the excess, and use the proceeds to buy more of the other asset, choosing the amounts so that each asset gets back to the percentage of your portfolio that you had originally chosen. This is not timing the market, because you do it once a year at the appointed time, and you don’t care whether the market is up or down - you simply sell off a piece of whichever asset is doing well, and use the proceeds to buy another piece of whichever asset is doing less well. How much? Enough to get your portfolio back to your original target percentages. It’s an algorithm that doesn’t require you to exercise any judgment about market conditions; it just automatically forces you to sell high and buy low.
The same strategy can be applied during post-retirement drawdown, and it sounds a lot like what you described: if equities did better than bonds this year, you sell equities until your portfolio is back to the stock/bond percentages you’ve been targeting. If you don’t need that much cash, then take the excess cash and shove it into bonds; if you need more cash, then sell off equities and bonds in the right amounts to maintain your target asset allocation percentages.
Wife and I have had a very low bond percentage for years, like 5%. A few years ago (about 8 years from retirement), we started ramping up our bond percentage by a couple of points per year, so that by the time we retire, it should be around 20%. If you follow the 4% rule, then the 20% of our assets that are in bonds would be enough to weather a 5-year market downturn without having to sell off any equities (in the 2008 crash, the S&P500 took a little over five years to return to its pre-crash high).