The financially organized person has many hallmarks, including holding little to no debt (or at least a sound strategy to pay down any debt), having a monthly budget, and working actively toward clear financial goals. One of the signs of the truly elite financial managers among us is consistently maxing out one's retirement accounts every year, but only one in five Americans manages to do this, according to the 2019 TD Ameritrade Retirement Pulse survey.
Perhaps unsurprisingly, baby boomers are the most likely to do this, because at this stage in their lives, there aren't many financial goals left to save for apart from retirement. Millennials came in a distant second, with Generation X bringing up the rear. This makes sense when you consider the financial obligations many in this generation have to both their children and their aging parents, not to mention their own debts.
Maxing out retirement accounts isn't easy for a lot of people, but it's one of the best things you can do for your future if you can afford to do so. Here's a look at how it can benefit you and where you can find a little extra cash to put toward your retirement.
The difference that maxing out your retirement accounts can make
Most Americans don't even come close to maxing out their retirement accounts. The average 401(k) contribution as of the end of the first quarter of 2019 was just $2,370, according to Fidelity. This is a record high, but still a far cry from the $19,000 401(k) contribution limit for the year. Adults 50 and older may contribute as much as $25,000. IRA contribution limits are lower -- just $6,000 for adults under 50 and $7,000 for adults over 50.
Let's use the above figures to estimate what difference maxing out your retirement savings could make over time. First, let's establish the average $2,370 401(k) contribution as a baseline. That comes out to $197.50 per month. If you contributed this amount every month for 30 years and earned a 7% annual rate of return, you'd end up with a final balance of just under $224,000. The average household headed by an adult 65 or older spends nearly $50,000 per year, according to the Bureau of Labor Statistics, so this probably won't even see you through five years of retirement. Social Security might help you limp along a little further, but you can forget about travel and big-ticket purchases. Just covering your basic living expenses will probably be a struggle.
Now let's imagine that you contribute the maximum $6,000 to an IRA every year for 30 years with a 7% annual rate of return. That will leave you with nearly $567,000, which is much better than $224,000, but still probably not enough for most retirees.
What if you contribute the maximum $19,000 (about $1,583 per month) to a 401(k)? Over the same time frame with the same annual rate of return, you'd end up with close to $1.8 million. Now that's a nest egg that most people can retire comfortably on, and it will probably even allow for some travel and maybe some big-ticket purchases.
The above figures don't account for changing market conditions or the fact that retirement contribution limits change from year to year, but they give you a rough sense of where you could end up based on how much you set aside for your retirement each month.
How to boost your retirement contributions
I hear many of you saying, "That's easier said than done. I don't have a spare $19,000 to put toward retirement every year." And I hear you. It's not easy for most people. But the good news is that you might not even need to save that much per year to retire comfortably, depending on when you start saving, how long you anticipate your retirement lasting, and how you plan to spend it.
Before raising your retirement contributions, it's best to estimate how much your retirement will cost you by multiplying your annual living expenses in retirement by the estimated length of your retirement, adding 3% annually for inflation. Use a retirement calculator to help you estimate your investment rate of return -- 5% or 6% is a good starting point -- and subtract money you expect from Social Security, a pension, or a 401(k) match to figure out what you must save on your own. If you find you need to boost your retirement contributions, try some of these tips.
If your company offers a 401(k) match, you should also be doing everything you can to take advantage of that. Do whatever you have to -- cut back discretionary spending, bring lunch to work instead of dining out, brew your coffee at home or skip it altogether -- to free up enough cash to set aside for retirement so you can get your full employer match. This is free money that reduces the savings burden on you. There's no good reason not to take it, unless doing so would jeopardize your ability to cover your basic living expenses. Watch out for your company's vesting schedule, though. If you leave before you're fully vested, you might forfeit some or all of your employer match.
Beyond that, try making some lifestyle changes. Look for ways to reduce your monthly expenses and create a budget you can stick to that prioritizes retirement saving over discretionary expenses. You could also look for ways to increase your income today, like pursuing a promotion or starting a side business. Put the extra money you earn toward retirement first. You won't miss it because you're not used to having it. If you do start a side hustle, don't forget to set some of that money aside for taxes, too.
Delay your retirement if nothing else works. This gives your current savings more time to grow and gives you more time to save for your future. It can also reduce how much you must save per month to hit your goal. If you wanted to save the same $1.8 million as in our example above, but you had 40 years to do it instead of 30, you would need to save only about $750 per month instead of the $1,583 we used above, assuming the market conditions were more or less the same over this period as in our previous example.
Don't get too stressed out if you can't save as much as you want to for retirement this year. Try some of the tips above until you find a plan that works for you. You could also consider enlisting the help of a financial advisor if you're not sure how to best manage your money on your own.