## IRS Raises 2012 401(k) Limit To $17,000

Posted by Phil Ferguson on October 31st, 2011 – 2 Comments – Posted in Money Monday*NOTE: This post is part of an ongoing education series. This information is for educational purposes only. This information does not constitute investment advice. No rational person would make investment decisions based on a blog post. Please consult with your financial advisor before taking any action. *

You’ll be able to contribute up to $17,000 to a 401(k), 403(b), most 457 plans or the federal government’s Thrift Savings Plan in 2012.

The limit for the last few years has been $16,500. So if you are fortunate enough to make quite a bit of money in 2012 you can set aside $17,000 in your 401(k).

Workers age 50 and older can continue to make catch-up contributions of up to an extra $5,500 for the year, the same amount as in 2011.

So, if you are over 50 you can contribute $22,000 in 2011 and $22,500 in 2012.

The maximum IRA contribution limit for 2012 remains unchanged at $5,000 ($6,000 if you are age 50 or older by the end of the year). But the income eligibility limits to deduct IRA contributions have increased. Single filers and heads of household who participate in a retirement plan at work can deduct the maximum IRA contribution if their modified adjusted gross income is $58,000 or less and a partial contribution is their income is up to $68,000 (up from $56,000 and $66,000 in 2011). Individuals who do not participate in a workplace retirement savings plan can deduct their full IRA contribution regardless of income.

“…do not participate…” read as does not have a workplace plan available. If you choose not to participate but it is available then the income limits do kick in.

My simple rule of thumb is that if you save 10% of your gross income per year for 30 years and make 10% return per year, you will have more income per year after retirement than when you were working.

What assumptions are you making in 30 year/ 10% comment? Let’s say $100k income, so $10k per year @ 10% for 30 years is $1,644k x widely accepted 4% withdrawal rate = $65.8k income in NOMINAL dollars. Add in 4% inflation to make the real interest rate 5.77%, and the real savings after 30 years is $759k x 4% = $30.4k income.

I realize that my calculation in real dollars is simplistic in ignoring real salary increases, while my nominal calculation is nearly meaningless except to set up the real calculation, but even assuming an optimistic (albeit historically accurate) 10% return, I don’t think a 10% savings rate is anywhere close to enough to retire on in 30 years, unless the hypothetical retiree is much older than conventional retirement age and can afford a much higher withdrawal rate due to life expectancy.

If the hypothetical saver starts in their mid-twenties, I’d say the savings rate would need to be at least 25%.

@ryan,

Excellent question. You are right it is all about the assumptions and my rule of thumb is intended to be a very simple and easy to understand guesstimate.

I ran the numbers again using $10,000 per year (invested at the start of each year) and 10% return each and every year. I show ~$1,809,000 after 30 years. ($1,634,000 appears to be after 29 years). You are right that the 10% is historically accurate (of course one could argue for different numbers – one can always argue for different numbers). I have no way to know if 10% is too low or too high so I will stick with that rate for now.

4% is very conservative and in my opinion 5% is a reasonable withdraw rate. This would provide an income of ~$90,500 (5% * ~$1,809,000). Therefore, your income would be $90,500 per year which is slightly greater than the $90,000 ($100,000 – $10,000) you made in the first year. As you point this is in nominal dollars and does not take into account inflation.

One could add inflation and that would reduce the real dollars but one could also assume that you will make more income as you gain work experience and/ or seniority and that would increase your real dollars. In an effort to provide a simple guideline to investors I have left off both of these confounding factors.

If any readers would like a personalized calculation for their situation they can contact me and I will create an analysis just for you.