The 401(k) contribution limit for employees in 2025 increased to $23,500, up from $23,000 in 2024. The employer contribution limit also increased to $46,500, bringing the employee and employer 401(k) contribution limits to $70,000 for 2025.
Don’t underestimate the power of employer 401(k) contributions, especially as you advance in your career. As you gain seniority, you may find that employer profit sharing or matching contributions become more important. In strong years, some companies increase their profit-sharing contributions to reward employees. For example, the year I left Credit Suisse, I received a matching/profit-sharing contribution of $22,000 on top of my maximum 401(k) contribution.
For employees age 50 and older, the catch-up contribution limit remains at $7,500, unchanged from 2024. However, starting in 2025, employees between the ages of 60 and 63 will benefit from an increase in the catch-up contribution limit of $11,250 US, instead of the standard limit of US$7,500. , providing additional support for those approaching retirement.
Contributing to your tax-advantaged retirement accounts is only one part of your new three-legged retirement stool. The other two are creating taxable retirement accounts and growing your “X factor” – a unique source of potential income or value outside of traditional investments.
Since pensions are now scarce for most employees, and Social Security is expected to be 25% underfunded, it’s smart to view Social Security as a bonus rather than a guarantee.
Special limited-time promotion: Free financial check and $100 gift card
If you have over $250,000 in investable assets, take advantage of this opportunity and schedule a free consultation with one of Empower your financial professional here. Complete two free video calls with an advisor by November 30, 2024, and you’ll receive a free $100 Visa gift card. It’s worth getting a free financial check-up to see how your investments will stand over the next four years.
Your goal: To max out your 401(k) each year
If there’s one essential step every employee should take, it’s to strive to max out their 401(k) contributions each year. Because contributions are made through pre-tax income, maxing out your 401(k) is more manageable than it may seem. Plus, by making it automatic from every paycheck, you’ll quickly adapt to living within your means.
After just 10 years of consistent contributions, you’ll likely be surprised by your balance. In addition to your own contributions, you often grow your account through employer matches and investment returns, which can add up significantly.
If you earn more than $70,000 per year, maxing out your 401(k) should be a priority. You will still have about $46,500 of taxable income to cover your living expenses. And if you’re earning $100,000 or more, there’s no excuse not to maximize that benefit. You are at least in the 22% marginal federal tax bracket and earn enough to live comfortably. Make sure you’re setting yourself up for a stronger retirement.
For those who earn less than $70,000, maxing out the annual 401(k) in 2025 may be difficult but still achievable, especially for income above $40,000. A lot depends on your budget and lifestyle.
Living with family rent-free? You may also be able to max out both your 401(k) and Roth IRA, adding another $7,000 to your retirement. Just be sure to help out around the house, those savings come with some extra duties!
Most employees are far from maxing out their 401(k) plans.
Even though we know we should take full advantage of tax-advantaged retirement accounts, most don’t. According to Vanguard dataonly 14% of employees maxed out their 401(k) in 2023. And if those employees aren’t maxing out their 401(k), I suspect they’re not building a taxable investment portfolio either.
Meanwhile, according to survey data from Northwestern Mutualthe magic number for a comfortable retirement has risen to $1.46 million, up 15% from the $1.27 million reported in 2023. In 2020, the target number they reported was just $951,000.
There is a clear disconnect between how much people save for retirement and how much they think they will need once they retire. Fortunately, Social Security still provides benefits to eligible Americans, although it may not be sufficient on its own. For those who aren’t saving aggressively, the reality is that they’re probably planning to work longer to bridge the gap.
The next step after contributing to your 401(k): Grow your taxable investments
After maxing out your 401(k), the next step is to grow your taxable investment portfolio as much as possible. Think of your 401(k) as the foundation of your retirement; Everything else builds on top of it. This taxable portfolio includes your brokerage account, real estate investments, venture capital, trading stocks, and other alternative investments.
Worst case scenario, by age 60, you’ll likely have at least $1 million in a 401(k) to support your retirement. At best, you’ll have millions in both your 401(k) and taxable investments. If you grow your taxable portfolio significantly, you may generate enough passive income for early retirement.
As a financial freedom fighter, your mission, if you choose to accept it, is to max out your 401(k) each year and then create a taxable investment portfolio equal to 3X Your 401(k) balance.. To achieve this, by age 50, you should have the option of early retirement or switching to a lower-paying, more fulfilling career if you so choose.
The base case for the target of a taxable investment portfolio
Below is a basic retirement savings chart I created to help visualize how much you might accumulate over time. By age 30, aim to have a taxable investment portfolio equal to your 401(k) balance. As your income grows, ideally, you can allocate more to taxable investments, given 401(k) contribution limits.
Once you cross the $100,000 investment limit, the compounding really starts. For example, if you invested $1 million in the S&P 500 in 2024, it would have increased by more than $250,000, showing the impact of market growth over larger amounts.
Take full advantage of your 2025 401(k) catch-up contributions.
If you can’t meet these investing milestones by age, don’t panic. Instead, focus on building a solid savings and investment plan to get yourself back on track.
For those over 50, remember that you can contribute an additional $7,500 in catch-up contributions to a 401(k) or 403(b) in 2025. If you’re between 60 and 63, this catch-up contribution increases to $11,250 US, totaling $34,750. Not bad, especially if you are financially comfortable and able to let that money grow without change.
You may also want to talk to a financial professional, like I did when I was 35 years old. If you’re behind on your retirement savings, it may be time to ease into the YOLO lifestyle — while it’s fun now, you may regret that spending once work is no longer an option.
Think of your 401(k) as retirement insurance, not a major resource
Although contributing to your 401(k) plan seems like locking away your hard-earned money for decades, try to look at it as a form of retirement security. This includes a Solo 401(k), 403(b), Thrift Savings Plan, SEP IRA, IRA, and Roth IRA.
Once you start treating maximizing these contributions as non-negotiable, with any returns as a bonus, you’ll be better able to focus on building wealth outside of these accounts. Frankly, I don’t know of any high-net-worth individuals who rely solely on a large 401(k) to fund their retirement — no one.
Instead, they invest aggressively outside of their 401(k), because their income has long exceeded contribution limits, prompting them to find other ways to grow wealth. So, if maxing out your 401(k) seems like a stretch, increasing your income and cutting expenses should be a priority.
Find income for 401(k) contributions.
A year after leaving finance in 2012, I took on part-time consulting roles at Personal Capital and other fintech startups from 2013 to 2015. Having maxed out my 401(k) since my first full-time job In 2000, it was strange not to contribute pre-tax dollars at age 35. As Financial Samurai grew, I also contributed to our SEP IRA plan as much as possible.
Once my core contributions were covered, I focused my efforts on building a strong taxable portfolio, investing heavily in physical real estate in San Francisco, private real estate in the Sunbelt, venture debt, and venture capital. These investments provide potential capital appreciation and passive income.
Although I had considered easing into taxable portfolio growth once I turn 45 in 2022, purchasing a new home in 2023 and Trump’s re-election reignited my motivation to continue growing wealth. At this point, finding a balance between my financial goals and family time is key. I know that if I spend too much time trying to make more money, I will inevitably become miserable.
At 47 years old, I’m starting to see a little glow on the horizon that I’ll finally have access to a Solo 401(k), Rollover IRA, and SEP IRA. However, after 37 years of growing these accounts, I imagine the biggest challenge will be actually withdrawing from them. We’ll see when the time comes.
Readers, are you maxing out your 401(k) this year and next? Why or why not? How Does Your Taxable Investment Portfolio Come to Financial Freedom? And are you disappointed that the 401(k) contribution limit for 2025 increased by only $500?
Diversify your investments beyond your 401(k)
If you are looking to diversify your investments beyond your 401(k), Check out Fundrise. Fundrise manages more than $3 billion in private real estate investments, focusing primarily on the Sun Belt region, where valuations are generally lower and returns tend to be higher.
With the Federal Reserve entering a multi-year cycle of interest rate cuts and Trump as president, demand for real estate may increase in the coming years. Given Trump’s background and success in real estate, I would not be surprised if he introduces incentives for buyers and policies to support downtown areas, which were key to his electoral victory.
I have personally invested over $270,000 with Fundrise, and they are a long-time sponsor Financial samurai.
Get free financial advice and $100
If you have over $250,000 in investable assets, schedule a free consultation with one of Empower your financial professional here. Complete your video consultation before November 30, 2024, and you’ll receive a free $100 Visa gift card. There is no obligation to use their services after that.
A year after leaving finance, I had a free consultation with an Empower finance professional, which revealed a major blind spot. I had 52% of my portfolio in cash, thinking I needed to invest like a conservative 65-year-old.
The financial expert reminded me that at 35 years old, I still have many financial opportunities ahead of me. Within three months, I invested 80% of that money and used the rest as a down payment on a fixer-upper, and both decisions paid off well.
The Statement is provided to you by Financial Samurai (“Promoter”) who has entered into a written referral agreement with Empower Advisory Group, LLC (“EAG”). Click here To learn more.