investing

Pump Up Your 401(k) Now

You’re not on track to hit the $18,000 maximum contribution limit? Here’s how to max out before the end of the year.

I hate exercising. Hate it. My friends talk about that elusive “runner’s high.” Well, I’ve never experienced that. Running just gives me shin splints and sore knees. It has certainly never given me a buzz.

But you know what? As much as I hate exercising, I do it. And do you know why?

Because my wife tells me to.

My wife cares about me and wants me to be healthy. She forces me (under much duress) to eat spinach salads and ride my bike up and down the hills surrounding my house at night. And she’s been known to hide my cigars and whiskey, too. Which is just mean.I don’t like it. But I listen to her because I know she’s right.

So today, I’m going to nag you. Don’t worry, this has nothing to do with exercise. In fact, I’m happy to share a cigar and a swig of whiskey out of my flask later tonight if you happen to be out “exercising” on your bike like I am.

No, I’m going to nag you about your 401(k) plan. And you should listen to me here, because I’m right. The 401(k) plan is the single best savings vehicle for the vast majority of middle-class Americans. If you work for your money, you should be using your 401(k) plan as your primary savings vehicle. And you should be maxing out your contributions for the year. In 2015, you can contribute $18,000, not including any additional matching from your employer.

As I wrote earlier this year, if you find yourself in a high tax bracket, you get an effective “return” of as much as 46% just for contributing and having your employer match. And that’s without putting a single dollar at risk in the stock market. There is no investment anywhere else in the world that offers safe returns at anything close to those levels.

So here’s where the nagging comes into play. If you’re not on track to put the maximum $18,000 allowed into your 401(k) plan this year, log in to your account to make changes today. You have three months until year end. That’s plenty of time for most people to get to $18,000, even if you’re starting at zero.

You may be thinking, “There is no way the math works out. I can’t possibly save that much money in that little time.”

Yes, you can. Take charge. If you earn, say, $72,000, then $18,000 amounts to three months’ worth of gross income for you… or exactly the amount of time we have remaining in 2015.

Yes, I know you are paying Social Security and Medicare taxes and probably have health insurance too. So you can’t technically put 100% of your income into your 401(k) plan. The fact is that you still have the means to get to $18,000, or at least awfully close.

Sure, you still have to eat and pay your mortgage. I get that. But if you’ve been at least a little responsible with your money, you probably have some cash or investments sitting in non-401(k) savings. If that’s the case, then drop every last penny of your paychecks for the rest of the year into the 401(k) account, and live off of your savings until year end. The net result is that you’re effectively converting taxable savings into tax-free savings in your 401(k) plan. Those savings will now be safe from the tax man until you eventually take them out in retirement.

So before you close this page, log in to your 401(k) plan. If you’re not on track to contribute $18,000 by year end, make changes. It’s for your own good. Oh, and try to eat a salad or two while you’re at it.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

About the Author

Charles Lewis Sizemore

Chief Investment Officer, Sizemore Capital Managaement LLC

Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas. Charles is a frequent guest on CNBC, Bloomberg TV and Fox Business News, has been quoted in Barron's Magazine, The Wall Street Journal, and The Washington Post and is a frequent contributor to Yahoo Finance, Forbes Moneybuilder, GuruFocus, MarketWatch and InvestorPlace.com.

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