Though a 401(k) isn’t your only choice when it comes to retirement savings plans, what makes it such a valuable tool is the fact that its annual contribution limits are much higher than those of an IRA. Currently, workers under 50 can save up to $19,500 in a 401(k) per year, while those 50 and older get a $6,500 catch-up that brings their annual limit up to $26,000.
If you have access to a 401(k) plan, you don’t just have an opportunity to save a bundle — you have a solid shot at becoming a millionaire in time for retirement. In fact, if you start maxing out that account at an early enough age, you might hit millionaire status years before retirement is even on your radar.
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What can maxing out a 401(k) do for you?
The money in your 401(k) shouldn’t just there doing nothing. Rather, it should be invested — ideally, in stocks, especially when you’re years away from retirement and can take on that risk. In fact, if you go heavy on stocks, there’s a good chance your 401(k) will generate an average annual 7% or 8% return. Play it safer, and you’ll see lower returns. Either way, here’s a sampling of how long it might take you to amass $1 million in a 401(k) if you max out every year at $19,500:
|
Average Annual 401(k) Return |
Number of Years It Will Take to Reach $1 Million (Assuming a $19,500 Annual Contribution) |
|---|---|
|
8% |
21 |
|
7% |
23 |
|
6% |
25 |
|
5% |
27 |
|
4% |
29 |
Table and calculations by author.
As you can see, the higher the return your 401(k) generates, the quicker you’ll become a millionaire. But watch what happens if you max out your 401(k) for 40 years at today’s limits. Assuming you start at age 25 and that your investments deliver an 8% return on average, you’ll actually wind up with a whopping $5.29 million. Talk about impressive. And that, of course, is based on today’s contribution limits. Though 401(k) limits didn’t change from 2020 to 2021, in the past, they’ve risen from year to year. This means that if you commit to maxing out your 401(k) throughout your career, you could easily retire with a fortune of money, especially if you’re willing to invest aggressively by loading up on stocks.
Of course, not everyone can max out a 401(k) from an early age, but as your earnings increase, it’s a worthwhile goal to aim for. Another thing you should realize is that if you save in a traditional 401(k), your contributions will be tax-free, which means the amount you put into your retirement plan is money the IRS can’t tax you on. And that alone makes maxing out worthwhile.
If you’re nowhere close to maxing out your 401(k) at present, aim to get closer and closer each year. Look at cutting back on expenses you can do without or see about boosting your income with a side job. If you invest your savings just right, maxing out a 401(k) could make you a millionaire in just over 20 years, and that’s a great way to set yourself up for the retirement of your dreams.