Just starting your job? Don’t sleep on this aggressive savings tactic.

A lot of my buds are going to begin their careers as lawyers in the next few weeks, but this piece is not exclusive to them. This is for anyone who may be joining the workforce or has recently joined the workforce and wants to aggressively get some money set aside for retirement.

This tactic that I will present can be primarily used by high earners but also by those with too much cash on hand.

Our weapon of choice is going to be the good ol’ 401(k). The 401(k) has a maximum employee contribution of $23,000 for 2024. (Please note: your employer’s matching contributions DO NOT count towards this annual limit).

Let’s take a hypothetical and build upon it so we can understand what the process actually is.

We’ll call our new hire Person A. Person A just began their job and is going to be earning $225,000 annually. Essentially, they have about 3-months to reach the maximum employee contribution in their 401(k). There are a few potential hitches to this savings tactic, which will be explained later.

Person A makes $18,750 per month. This means that if they were paid for 3 full months, October to December, they’d be paid a total of $56,250 over that time frame.

They could theoretically contribute 41% of their salary to their 401(k) and reach the maximum for 2024.

This allows for Person A to save the maximum to their 401(k) in 2024 even though they were only working for about 3 months. Why is this so important? Because these accounts have limits for a reason, there are tax advantages associated with 401(k)s.

You cannot go back in time to contribute, but you can accelerate your contribution rate through the rest of the year.

Now, this also works for people who are holding too much cash. When we work with clients, we call this a rotation. You can increase your 401(k) contributions and pull cash from savings (rotating) to supplement your expenses.

This is a great strategy to further retirement savings as you cannot defer cash into a 401(k). All contributions must be made from payroll.

As we approach the back end of the year, review your current cash position. Are you holding too much? How much has been deferred to your 401(k)? Can you increase your 401(k) savings and supplement your lifestyle with excess cash? Then you can consider increasing your 401(k) contributions through the back end of the year!! Rotation time.

Let’s revisit the high earners for a quick second. An annual salary of $225,000 would likely put you in the 32% tax bracket if you are taking the standard deduction and single.

Congratulations, you are already more than halfway there to top-ticking the federal tax rate. BUT!!! You are not going to make $225,000 in 2024.

That is a great time to consider making Roth 401(k) contributions. Paying the tax now for tax-free distributions upon reaching age 59.5.

Potential hitches to the tactic:

1) You obviously need to live. Try to get an estimate of your expenses so you don’t bite off more than you can chew. Remember this is an AGGRESSIVE savings tactic.

2) Some employers put a maximum percentage on the amount you can actually defer to your 401(k). The most recent benefits overview I read set the limits at 1% - 75% of compensation.

3) Service requirements: Some employers enforce a mandatory period of employment in order for you to be eligible for 401(k) deferrals.

As always, this isn’t to be taken as financial advice. Everyone’s individual situation will look different. This is just meant to serve as an educational overview on how to accelerate your retirement savings.

Bonus content:

Person A saves the maximum to their 401(k) in 2024. They then save $23,000 each year thereafter for 30 years. We’ll assume a growth rate of 7%.

Person B contributes nothing for this year. Then they begin to save $23,000 annually. We’ll assume they do so for 30 years with a growth rate of 7%.

Person A ends with: $2,416,923

Person B ends with: $2,241,848

Person A would end with $175,075 more but only saved an additional $23,000. Kind of wild, no?

Check me out on X/Twitter, whatever we want to call it now:

Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!