A workplace 401(k) allows you to invest for the future -- and sometimes to earn an employer match while doing it. In 2021, you're allowed to contribute up to $19,500 to a 401(k) if you're under 50 or $26,000 if you're 50 or older and eligible to make catch-up contributions.
If you can max out your contribution, the money that you invest this year will likely turn into a lot more than you expect by the time retirement age arrives.
Here's what your 401(k) could be worth in your later years
That's because the money you invest in your 401(k) benefits from compound growth (as long as you invest it wisely). And the more you invest, the bigger impact compounding will have. Once the money is invested and earns returns, all those returns are reinvested and also begin to earn money for you. And a larger investment means more potential returns to reinvest and put to work.
So, exactly how much will your $19,500 contribution be worth by the time you hit retirement? It depends on your average rate of return, as well as the number of years left until you start relying on your 401(k). The table below shows the substantial sum your 2021 contribution could turn into if you maxed out your eligibility this year and earned an average 8% annual return.
|If you have this many years to retirement:||A $19,500 401(k) contribution in 2021 could be worth this much by the time you retire:|
As generous as this amount is, you will end up doing even better if your employer matches at least some of your contributions.
Many employers offer to match 50% or 100% of your contribution amount, up to some percentage of your salary -- such as 4%. If you earn $60,000 and your employer matches 100% of contributions up to 4% of your salary, your match could be worth as much as $2,400 this year if you max out your 401(k) and earn the full match. This $2,400 alone could turn into $11,186.30 if you invest it over 20 years and average an 8% return. That's on top of the amount you'd end up with from your own contributions.
Remember, you may not be able to max out your 401(k) and invest the full $19,500 in 2021. But the fact is, compound growth will still help you out tremendously, and this year's contribution will be worth many times your initial investment if you're still years away from retirement. So, aim to invest as much as you can this year, as your future self will thank you.