Important points
- To fully benefit from your 401(k), a significant savings rate is generally needed; building up over time is beneficial.
- Key moments like a raise or a job change can be ideal times to boost your contributions without straining your budget.
- Reaching an income milestone, such as $150,000, often makes it easier to maximize retirement savings.
According to Vanguard’s How America Saves report, only around 14% of Americans contribute the maximum to their 401(k) plans each year.
While this figure might seem disheartening, it certainly doesn’t imply that reaching the max is unattainable. Actually, many who achieve the annual limit of $23,500 (for those under 50 in 2025) often do so incrementally rather than all at once. It’s generally a gradual process where you advance through consistent raises, increasing salary, and changes in financial priorities.
In the U.S., the average salary hovers around $62,000. So, even if your income is $100,000, you’d need to set aside about 23.5% of your earnings to optimize your 401(k) contributions, according to financial planner Michael Hunsberger of Next Mission Financial Planning. He notes it’s attainable, but not without its challenges. However, the benefits can be substantial, leading to increased savings, tax advantages, and a more manageable retirement life.
Why only 14% contribute the maximum amount to their 401(k)
The straightforward reason? Many individuals don’t earn enough.
Dwayne Reinike, founder of Valiant Financial Planning, points out a typical scenario: “If someone has an $80,000 salary, to maximize a 401(k), they’d need to contribute at least 28% of their pay.”
This can be a heavy burden, especially when considering ongoing expenses like housing, student loans, and family costs. Even those earning higher salaries may find their contributions capped due to IRS limits for highly compensated employees.
Most advisors suggest starting with a modest savings rate and gradually increasing it over time, as opposed to trying to hit the maximum right off the bat.
Hunsberger mentions, “It’s more advantageous to analyze the percentage of your income being contributed and try to raise that consistently.”
Important
The contribution limit for 401(k) plans for individuals under 50 will be $23,500 in 2025 and will rise to $24,500 in 2026. Those aged 50 and above can make catch-up contributions, allowing them to contribute even more, with limits typically climbing each year.
How to time your salary increase with contributions
A smart tactic is to boost contributions following a raise or when starting a new job.
Hunsberger advises that even minor increases in the cost of living should prompt you to consider raising your contribution percentage. “You’re not accustomed to living on the extra income, so you won’t even miss it,” he says.
Reinike shares this sentiment, suggesting that when you receive a raise, it’s an ideal time to allocate some of that additional income toward retirement. Beginning to maximize right away before adjusting your lifestyle is a smart move.
Automation can also assist in staying consistent.
“For those who struggle with increasing their contributions, we recommend automating your 401(k) to rise by a specified amount annually,” Reinike notes.
If you generally anticipate a 3% salary increase, boosting your contributions by 1% or 2% is manageable and often goes unnoticed.
Income milestones that make maximizing contributions realistic
While saving habits are crucial, advisors agree that income remains a significant factor.
If you aim to set aside 15% of your income—which is generally seen as a reasonable target—you would need to earn around $157,000 to fully utilize your 401(k), according to Hunsberger. For those aged 50 and up adopting catch-up contributions, the necessary income jumps to $206,000 or more.
Reinike simplifies it further: “If you earn over $235,000 annually, maximizing your 401(k)—which would be 10% of your income—should be feasible.”
Regardless of your starting point, consistency is vital. Justin Pritchard, founder of Approach Financial, emphasizes that it’s sensible to enhance contributions in line with income growth and as financial stability is achieved.
Conclusion
Maximizing your 401(k) isn’t exclusive to the wealthy. It’s a long-term goal that many Americans can attain through consistent and incremental savings increases. As your earnings rise or financial priorities shift, you might find you can save more than you initially thought.
“Even saving a little is better than saving nothing,” Pritchard reminds us. “Contributing enough to secure a full employer match is nearly always a sound decision.”
