In 2020, you can contribute a maximum of $19,500 to your 401(k), or $26,000 if you're 50 or over. Most people don't contribute the maximum amount to these tax-advantaged retirement accounts. But if you're able to do so and start contributing at the age of 25, you should have well over $1 million in your account by the time you hit the age of 45.
Maxing out your 401(k) could make you a millionaire in 20 years
401(k) contribution limits can change over time, so it's impossible to know exactly how much you'll be able to contribute going forward.
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But since the contribution limit in 2010 was $16,500 for those 50 and under, and it's now up to $19,500, we can see that the amount you can contribute increased about 18% over the past decade. If you assume contribution limits will rise by the same amount going forward, that's around a 1.8% annual increase averaged out.
If you start contributing $19,500 this year and keep contributing the max every year, assuming that 1.8% annual increase, you'd end up with around $1.098 million in 20 years' time if you earn an average 8% annual return.
That means if you start maxing out your account at age 25, you could end up with over $1 million well before you're ready to retire.
Of course, if you're older when you get started, you'll be older than 45 when your 20 years is up. But you can still amass a seven-figure nest egg in just two decades. And if you're 50 or over and eligible for catch-up contributions, you can hit that target in an even shorter time frame, since maxing out your 401(k) with these added contributions means you'll be able to put even more money away.
These figures don't take into account an employer match, either. If your employer makes contributions on your behalf, this free money will reduce the time it takes to reach your million-dollar goal.
Is $1 million enough for a secure retirement?
Amassing $1 million may seem like it's out of reach if you aren't close to maxing out your 401(k) right now. The reality, however, is that even a million-dollar nest egg may not be enough if you're a long way away from retirement.
You need to consider the effects of inflation, which will reduce the buying power of your million, as well as the effect of taxes on withdrawals if you aren't contributing to a Roth account. Healthcare will also likely be a huge expense in your later years, as the Employee Benefit Research Institute estimates a senior couple may need as much as $325,000 just to cover their out-of-pocket medical care expenses during retirement.
If you're maxing out your 401(k) every year throughout your career, you should end up with plenty of money, since your nest egg should be well over $1 million by the time you hit retirement age. But if you aren't contributing the max, you'll want to go through the process of setting your personalized retirement savings goals, so you can make sure you're on track to amass the nest egg you need for a secure future.
