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Maxing Out Your 401(k) Could Earn You This Much Money Over Your Career

By Diane Mtetwa - Updated May 14, 2021 at 9:08AM

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Making the most of this tax-advantaged investing tool could turn you a retirement millionaire.

A 401(k) can be a valuable resource in your retirement savings strategy. If you consistently take maximum advantage of its benefits, you should enter your golden years quite well off. In 2021, people whose employers offer such accounts can contribute as much as $19,500 to them.

The government has gradually increased the annual 401(k) contribution limit over the years, and it's likely that it will continue to do so. But if it stays the same, this is how much you could accumulate over time by maxing out your contributions, assuming the max individual contribution in 2021 of $19,500, to this tax-advantaged retirement account.

Gold letters that spell the word 401k.

Image Source: Getty Images

How it could grow 

If you routed as much as you're legally allowed to contribute to your 401(k) for 30 years, and your investments generated an average annualized rate of return of 7%, your balance at the end of that period would be $1,970,924.

With an 8% annualized rate of return, that would grow to $2,385,744, and with a 9% rate of return, it would reach $2,897,217. An average rate of return of 10% would net you $3,528,397.

Rates of return like those are not unreasonable for investors to expect. According to a model constructed by the investment firm Vanguard, between 1926 and 2020, portfolios that consisted of 20% stocks and 80% bonds grew by an average of 7.2% a year. Increasing the stock exposure to 40% boosted the annual return to 8.2%, a 60% stock/40% bond split lifted it to 9.1%, and an aggressive 100% stock allocation returned — on average — a 10.1% rate of return. However, the higher the stock exposure in your portfolio, the higher the risk. Increasing the proportion of stock added to the number of years in which those average portfolios declined in value, and increased the magnitude of the losses in their worst years.

Risk tolerances 

How comfortable you are about financial risks will be influenced by many things, but one of the most important points you should consider is your time horizon — aka, when you plan to begin using the money you're investing. The closer you are to the day when you start taking withdrawals from your retirement accounts, the less time you have for them to recover from potential downturns and bear markets. As such, keeping your 401(k) invested primarily in stocks later in life could leave you in a position where you'll need to sell beaten-down equities to pay your bills, locking in those losses.

To avoid this, investors approaching retirement can gradually increase the percentage of their portfolios allocated into safer investments like bonds and decrease their stock exposure. But the price of that reduced risk will likely be a lower return on investment. It's important to factor that reduced growth into your long-term plan so that you don't come up short of your financial goals.

If you can't max out your 401(k) every year

Admittedly, for most people, hitting the annual contribution limit on 401(k) every year will be an unreachable goal. Some of us may never achieve the financial flexibility to manage it even once during our working lives.

Still, doing it for as many years as you can could put you in a reasonably comfortable position in retirement.

For example, if you don't start investing for retirement until the middle of your career, but then max out your 401(k) contribution annually for 20 years, with an average rate of return of 7%, you'd wind up with a portfolio worth $855,371. With an 8% rate of return, that would grow to $963,747. A 9% annualized return would get your balance to $1,087,408, and  10% would see your account grow to $1,228,549.

Realistic retirement goals (and a vital bonus)

Even if you're unable to max out your 401(k), it's a good idea to contribute as much as you can to it for as many years as you can. Whatever you set aside will certainly improve your financial situation in retirement compared to not preparing at all. (Relying solely on Social Security is not a strategy that will lead to a comfortable lifestyle.)

And as you probably already know, the majority of 401(k)s come with company match programs that match your contributions up to a set percentage of your salary. For example, if you make $60,000 a year and your employer has a 4% dollar-for-dollar matching program, it will contribute up to $2,400 to your 401(k) each year as long as you do the same. This means that you could have a total of $4,800 in contributions for that year. Do that every year for 30 years at a 7% annualized rate of return, and you would wind up with a portfolio worth $485,152. At an 8% rate of return, that would grow to $587,260, at a 9% rate of return, you'd have $713,161, and at 10%, it would be $868,528.

Finally, there's one more benefit these accounts offer that can help you out if you got off to a slow or late start in your retirement preparations. Once you turn 50, the IRS lets you contribute an extra $6,500 each year to your 401(k). That can help compensate up for years when you couldn't save as much as you might have wanted to. For someone planning to retire at 67, taking advantage of that catch-up contribution every year they are eligible to do so would add an extra $214,494 to the value of their portfolio at a 7% average rate of return, $236,927 at 8%, $261,959 at 9% and $289,895 at 10%. 

If you have access to a 401(k), it can be one of the best tools at your disposal for investing money toward your retirement — even if you can't max it out every year. Consistently contributing as much as possible to this tax-advantaged account could make it your biggest asset by the time you retire. 

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