Becoming a millionaire could be just 23 years away for those who are motivated enough to max out their 401(k)s every year. It may not be the fastest or most exciting path to becoming a millionaire, but it's a much surer bet than trying to get lucky on lottery tickets. Below, I'll walk you through the math and we'll take a look at how you might even be able to speed up the process.

How maxing out your 401(k) can make you a millionaire in 23 years

First question: What does it mean to max out your 401(k)? The answer varies from year to year. In 2020 and 2021, you're allowed to contribute up to $19,500 to your 401(k) if you're under 50, or $26,000 if you're 50 or older.

Smiling man holding handful of hundred dollar bills

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For the purpose of this example, I assumed that you started saving at 22 and contributed $19,500 per year. That comes out to $1,625 per month. If you saved this amount every month for 23 years and earned a 7% average annual rate of return, you'd have a little over $1 million by the time you were 45. 

Now, this scenario makes a lot of assumptions, and changing any of these affects how long it would take you to achieve millionaire status. First, it assumes you're consistently saving $19,500 per year. If you save less than this in a certain year, it's obviously going to take a little longer to reach seven figures. On the other hand, if the government increases the annual 401(k) contribution limits in future years, as it's likely to do at some point, that could enable you to save more in a given year and become a millionaire faster.

The above example also assumes you earn a 7% average annual rate of return on your investments. Some years you may only earn 5%, and other years you might earn 8%. There isn't any way to predict exactly how your investments will perform, so you can only ever get a rough estimate of when you'll hit your target. That's why you need to review your retirement plan and make small adjustments annually to keep yourself on track, whether you're trying to max out your 401(k) or not.

Finally, our scenario doesn't include any company match or after-tax 401(k) contributions. A company match is money your employer contributes to your 401(k) on your behalf, while after-tax contributions are a special type of contribution you may be able to make if you'd like to set aside even more for retirement. They don't give you the same tax breaks as your first $19,500 in contributions, but they could still help you save a little money. 

Altogether, you're allowed to add up to $57,000 to your 401(k) in 2020 or $58,000 in 2021. Adults 50 and older can add another $6,500 to these totals. This includes your first $19,500 or $26,000, plus any company match and after-tax contributions.

How to max out your 401(k)

I imagine the next question a lot of you are asking is how you're supposed to find a spare $19,500 every year. That's fair. But the first thing to remember is that you don't necessarily have to save that much. If you're getting an employer match, you may be able to get to $19,500 without saving all that on your own. And there's no rule saying you have to max out your 401(k) in order to retire a millionaire. It's totally possible to save $1 million or more and never max out your 401(k). It'll just take you a little longer to get there.

But if you're determined to save $19,500 this year or next year, the first step is to look at your budget to see where you can make changes to give yourself some extra cash for retirement. See if you can eliminate unnecessary purchases and look for ways to lower your essential expenses, like using coupons or credit card rewards to save a few dollars.

You should also investigate ways to increase your income. Requesting a raise might not be an option in the current economic climate, but you can always check with other companies in your industry to see if they're hiring and offering a more competitive wage. Or consider starting a side hustle. If you increase your 401(k) contributions to account for what you're earning from your side job, it shouldn't have a huge effect on your tax bill for the year.

If you find you can't save as much as you want to in a given month, don't get discouraged. Just do your best and adjust as you go along. You might be able to contribute more the following month to make up for the month you were short, or maybe it'll just take you a little longer to reach your goal. But as long as you're focused and contributing consistently, you can be pretty confident you'll get there eventually.