The maximum dollar amount an employee can contribute to their 401(K) is increasing $500 to $17,500 for 2013. Those who are 50 and older can contribute as much as $23,000.

Let’s break down $17,500.

That’s…

$1,453.33 per month.

$47.95 per day.

$1.9977 per hour (based on 8,760 hours per year).

$.0333 per minute.

Better get to saving.

Oh, and in case you’re interested…

The geometric average monthly rate of return for the S&P 500 Index since 1926 is .779%. If a person invests the maximum of $1,453.33 per month for 25 years and gets that kind of return, they could have $1.75 million.

Something to think about.

Interesting thought, and useful breakdown. It is so important for us to save every penny we can in these economic times. You never know what the future holds.

Your calculation drastically underestimates the return because it assumes no volatility. My guess is that you’re looking at well over $2 million in a realistic market.

Jack,

Help me out here – how does volatility boost returns? What exactly do you mean by realistic market? Not trying to be cute. I’m just not familiar with your thinking.

Well, let’s look at a stock that is flat over four periods — $10 per share. At the start of each period, we buy $100 worth. That’s ten shares each time. At the end of the fourth period, we have 40 shares at $10 each. We put in $400, and we have $400.

Now, we look at a similar stock, but the price varies a little: $10, $9, $10, $11, $10. (That fifth one is at the end of the fourth period. At the start of each period, we buy $100 dollars in stock: 10, 11.11, 10, 9.09. So at the end of the fourth period, we have 40.2 shares, not just 40!

That is the essence of Dollar Cost Averaging.

10,10,10,10 = geom average: 10

9,10,10,11 = geom average: 9.97491

Jack) pick numbers with the same geom average (10) then do your comparison.

No, BG. The Geometric Mean is used for the return rates, not for the prices.

The Geometric Mean for both sets is one.

First set: 10,10,10,10,10

(1 * 1 * 1 * 1)^(1/4) = 1.0

Second set: 10, 9, 10, 11, 10

(0.9 * 1.1111… * 1.1 * 0.90909…) ^ (1/4) = 1.0

Better example set (just drives home your point):

10,5,20,10 == geom average: 10

Resulting shares: 45 (compared to just 40 shares with no volatility).

BG, you are going to drive me nuts.

With those numbers, your returns are:

0.5, 4, 0.5

To get the geometric mean, we multiply those three numbers and take the cube root:

(0.5 * 4 * 0.5)^(1/3) = 1^(1/3) = 1

The geometric mean is 1.