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Can You Retire a Millionaire With an IRA Alone?

By Maurie Backman – Aug 18, 2021 at 6:47AM

Key Points

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No 401(k)? Here's what you need to know about building lots of wealth if you're limited to an IRA.

Workers with access to a 401(k) plan get to reap a number of important benefits. First, 401(k) plans often come with employer matches. Workers who contribute to those plans commonly get free money that can help them grow their balances substantially.

Secondly, 401(k) plans come with generous annual contribution limits. Currently, those sit at $19,500 for workers under 50, and $26,000 for those 50 and over.

In fact, if you save diligently from a young age, it's more than possible to retire a millionaire with the money you save in a 401(k). But can an IRA offer the same option? Or are you doomed to retire with less if you're limited to an IRA?

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Don't write off your IRA

It's true that IRAs don't come with company matches like 401(k)s (at least not traditional or Roth IRAs), so the money you put into your account will all have to come out of your own earnings. Additionally, IRAs have much lower contribution limits than 401(k)s. Right now, they max out at $6,000 for workers under 50 and $7,000 for those 50 and over.

Based on that, you might assume that it's impossible to retire a millionaire if the only savings plan you have access to is an IRA. But you'd be wrong.

It's possible to retire a millionaire with an IRA if you do the following things:

  • Fund your savings consistently from a young age
  • Invest your savings aggressively so your IRA generates solid returns

Now, let's say you start funding your IRA at age 25 and so do until age 65. Let's also assume that today's maximum contribution limits remain in place during that time, and so those are the limits you stick to.

If you max out your IRA at $6,000 for 25 years, and then at $7,000 for another 15 years, you'll end up with $1.58 million. However, that total also assumes that you manage to squeeze an 8% average annual return out of your IRA.

To be clear, that's more than doable with stocks. In fact, 8% is a bit below the stock market's average annual return. But you can't expect to score an 8% average yearly return with an IRA that's mostly loaded with bonds. And so if you want a shot at retiring a millionaire with an IRA, you'll need to be prepared to invest aggressively.

In fact, one benefit of saving in an IRA versus a 401(k) is that you'll have an opportunity to select individual stocks in your account. With a 401(k), you'll be limited to different funds that can be quite rewarding in their own right, but give you less control over your retirement portfolio.

Also, some of the mutual funds you'll find in today's 401(k)s charge high fees that can eat away at savers' returns. With an IRA, you'll generally have more options for lower-cost investments.

The bottom line on IRAs

IRAs are an extremely useful retirement savings tool, and if you manage yours the right way, you could end up a millionaire by the time your senior years roll around. And so if you don't have access to a 401(k) plan, don't sweat it. Instead, come up with a strategy so you can make the most of your IRA and use it to accumulate a lot of wealth.

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