401(K) Dollar Limit Raised to $17,500 in 2013

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.


$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.

Should I Pull Money Out of My 401(k) to Pay Off Debt?

This is good but he misses one point. I’m not sure if it’s true of all 401(k) plans but interest on a 401(k) loan usually is paid into the 401(k) account. In other words, the interest is your money. It’s as if you borrowed from the Bank of You. Also, some companies do allow contributions while paying back a loan.

I agree with everything else he says.

This Sounds Like a Dumb Idea: Cutting the 401(K) Deduction

Okay, I know the NY Post is usually alarmist but I have heard about this idea before. The idea supposedly being kicked around is to limit the amount employees and employers can put towards the employee’s 401(k) to a maximum of $20,000 or 20% of income, whichever is smaller. The current amount is a maximum of $50,000. I hope this does not happen as it sounds like a dumb idea to me.


Shouldn’t we be ENCOURAGING people to save towards retirement? The new rule would affect my wife’s 401(k) drastically at a time when we really should be saving as much as we can.

It always makes me laugh when I hear “experts” talk about how much a certain action will bring in tax revenues. Things NEVER work the way politicians plan.

It’s not clear from the article what happens to the accounts at retirement as to whether or not the withdrawals would be taxed.


Do You Know What Your 401(k)’s Personal Rate of Return is for 2011?

I just logged on to my wife’s 401(k) account. The balance is roughly $60,000 less than it was at the peak early this year (and this includes several thousand dollars of contributions). OUCH. Fidelity calculates a personal rate of return, which is the return adjusted for the timing of contributions. Our personal rate of return is -12.2%. If the trend continues through the 3rd quarter, it will mark the second year for a negative personal rate of return since 2005 (the first year we started getting personal rate of return information from Fidelity). Here is our allocation (aggressive) and history if you’re interested:

Bottom line: I’m not worried. We’re still in for the long haul.

Getting a Raise? Up Your 401(k) Contribution a Percentage Point

Let’s say you make $75,000 per year and you are saving 10% in your 401(k). Now let’s say you get a 5% raise, which puts your new annual income at $78,750. Now, before you go make a budget based on your new income, I want you consider increasing your 401(k) contribution percentage by 1% to 11%. To see why, take a look at the graphic below, which shows three scenarios. The first column is the current income of $75,000 and a 10% contribution to the 401(k). The next two columns are at the new pay level. The second column shows what happens if the 401(k) contribution stays at 10% and the third column shows what happens if you raise it to 11%.

By raising the contribution percentage to 11%, you’ll accomplish:

1. Raising your contributions by $1,163 per year instead of just $375.

2. Your Federal income tax* will only go up $388 instead of $506.

3. You’ll still have a net income increase (after taxes AND 401(k) contributions of $2,200 over your previous income.

It’s amazing what a difference 1% makes. Sure, you could keep your contributions at the 10% level and still increase the dollar value of your contributions by $375 per year. But, by increasing the percentage amount by 1%, you’re taking advantage of the raise and bringing down your income tax liability and STILL bringing home close to $200 more per month. It’s a win-win situation.

That said, it’s VERY IMPORTANT that you make the changes to your 401(k) as soon as you find our about your raise. Otherwise, you run the risk of getting too comfortable (or dependent) with your new income and then it will be that much harder to increase your contribution percentage. That additional contribution amount could mean an additional $57,000 to your retirement plan in 25 years (assuming an 8% rate of return and not assuming future contribution increases).

This is how we build wealth.

* Based on 2010’s income tax brackets, standard deduction, exemptions, and the child tax credit (assuming a family of four).

An Idea I Don’t Like: Variable Annuities Inside a 401(k)

Yesterday’s Wall Street Journal had a special retirement planning section. One of the articles was about using annuities during retirement to boost income and decrease volatility. One of the stable annuities for doing that is a fixed immediate annuity. I don’t have a problem with fixed immediate annuities because they are usually inexpensive, easy to understand and can offer retirees income stability while their other assets are invested more aggressively.

The article also mentions adding a variable annuity to the retirement income mix, adding a rider (for an additional .5% to 1% a year) that gives the annuity holder a set percentage of the original investment, and investing the subaccounts as aggressively as possible since the retiree has the rider. No where does the article is mention surrender periods. I’m skeptical of this idea.

Anyway, the article ends with this paragraph:

Variable annuities are beginning to make an appearance in some 401(k) plans, and Great-West says it has gotten a lot of interest in its 401(k) annuity offering, launched last year.

Great-West is an insurance company. I remember reading not too long ago that people were confused by their 401(k) plans because they offered too many choices. I can’t imagine that offering them a variable annuity is going to make the choices any easier. I also don’t like the fact that Great-West is most likely making a lot more money off the variable annuity than they are the other investment choices. Looks like it could be a conflict of interest.

Thoughts? Do you like variable annuities inside a 401(k)?

NOTE: As is typical whenever I post anything that is skeptical of variable annuities, I’m sure this post will draw the ire of insurance salesmen. I don’t have a problem with you leaving comments that are beneficial. That said, let’s keep it on the mature level.

Your Goal This Year: Save $8.25 Per Hour

$8.25 per hour…

That’s the number I get when I divide $16,500 (the 2011 maximum allowable employee 401(K) contribution) by 2000 hours (40-hour work week, 50 weeks per year).

It seems like a lot. Granted, it does not include the tax savings on contribution. The actual dollar amount would be lower after taxes. Still, the amount is pretty high. That’s why this information should be provided to high school and college students. They need to see this information when deciding what career path to take.

These numbers also do not include the company match, which I think you should look at as icing on the cake and shouldn’t be considered in figuring your contributions.

Next, I’ll look at how much the maximum contribution could grow to over a career. Interesting stuff.