Let's get the basics out of the way right now. For 2013, most people can contribute up to $5,500 to IRAs, and those 50 or older can sock away $6,500. Those are the IRA contribution limits for the current tax year. For most folks, though, that's just not enough. Fortunately, you can (and probably should) save and invest much more than those IRA contribution limits.
Let's run through an example, to see what an IRA can do for your retirement. Using an online calculator, I assumed that a 40-year-old has a modest $25,000 Roth IRA account, and is adding $5,500 each year, until retiring at age 65. I plugged in estimated investment gains of 8% annually (the 8% might go in an "interest rate" box in some calculators), compounded growth once a year, and specified that annual contributions would be made at the end of each year. The result? A nest egg at retirement of $573,000.
That sure seems like a lot of money, and it is. But if you plan to withdraw a reasonable (but not perfect) 4% of that each year (adjusting for inflation) during your golden years, it will amount to $22,290 in your first year ($1,910 per month) -- clearly not enough for most of us to live on. Okay, sure, you'll likely receive Social Security, too. But will that total be enough? For many people, the answer is no. If you're used to living on $50,000 or $75,000 or $100,000 per year, you probably want to be socking away more than the annual IRA contribution limits.
Fortunately, you have a bunch of options. While $5,500 may be your IRA contribution limit for 2013, it's not all you're allowed to save and invest for retirement. (The $5,500 cap is also likely to be increased over time.)
For example, you may be able to take advantage of a 401(k) plan at your workplace. For 2013, the maximum that most folks can park in a 401(k) is $17,500 (and that goes for 403(b) and 457 plans, too). If you're 50 or older, it's a whopping $23,000. Better still, many employers will match some or all of what you contribute to your account. A common match is 100% of contributions up to 6% of your pay. For someone earning $50,000, that represents $3,000 of free money available for the taking. You can give your nest egg a big boost by maxing out the IRA contribution limits and participating in a 401(k) plan, too -- at least enough to maximize any employer matching.
Meanwhile, if you're self-employed, you're not out of luck. You may be able to sock away even more into a retirement account, far exceeding IRA contribution limits. My colleague Dan Caplinger has reviewed three solid options for self-employed folks. One, the Simplified Employee Pension, or SEP, has a 2013 maximum contribution of $51,000 for those who qualify. The SIMPLE IRA has a maximum of $12,000, or $14,500 for those 50 or older.
You have still more possible moves. You can always save and invest in a regular brokerage account, for example. You'll get no preferential tax treatment, but you can still grow substantial wealth that way. If you think your situation is bleak because you are nowhere near where you should be, you can make your retirement years much more comfortable by working a few more years. One or two years can make a meaningful difference, and a bunch more can be transformational.
So don't look at IRA contribution limits, or any other limits, and think that maxing that out is enough. It may not be. Look at your big picture, and be sure you're positioning yourself well for the future.