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Will Saving in an IRA Alone Shortchange You in Retirement?

By Maurie Backman – Sep 21, 2021 at 5:04AM

Key Points

  • Many workers don't have access to a 401(k) plan.
  • Anyone with earned income can open an IRA.
  • IRAs come with much lower contribution limits than 401(k)s, so for some savers, they may not be ideal.

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No 401(k)? Here's what you need to know about your retirement prospects.

While many Americans have access to 401(k) plans through their employers, not every company offers one. The good news is that if you don't have a 401(k) available for retirement savings purposes, you can always put your money into an IRA instead.

IRAs offer a number of benefits. For one thing, they allow you to invest your retirement savings in individual stocks, whereas with a 401(k), you can generally only buy funds. Many IRAs also come with lower fees than 401(k)s.

But if there's one downside to being limited to an IRA, it's not getting to set aside as much money each year for retirement as a 401(k) would allow for. Currently, IRAs max out at $6,000 a year for savers under 50, and $7,000 a year for those 50 and over.

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Image source: Getty Images.

When we compare these limits to what 401(k)s offer, it's easy to see why an IRA might seem like a second-tier choice. Right now, 401(k)s max out at $19,500 a year for savers under the age of 50, and $26,000 for those 50 or older.

If you have no choice but to keep your money in an IRA, you may be concerned that you'll end up shy of your goals once retirement rolls around. But actually, you may be surprised at how much wealth an IRA allows you to build.

Making the most of your IRA

If you only save in your IRA for a handful of years and you invest your savings conservatively, then yes, you may end up short on retirement income by the time your career wraps up. But if you save in an IRA for many years and invest your money wisely, you may end up with enough money to retire a millionaire.

No, that isn't a typo. Let's say you begin maxing out an IRA at the age of 25 and keep doing so until the age of 65. Let's also assume that this year's contribution limits don't change at all over time (that's unlikely to happen, but for the sake of simplicity, we'll go with that).

Finally, let's assume you invest your IRA heavily in stocks. If so, you might easily enjoy an average annual 8% return over 40 years, since that's a few percentage points below the stock market's average.

Ready for your final savings number? It's a rather impressive $1.58 million.

And remember, that number assumes that today's IRA contribution limits won't rise. Though those thresholds don't always increase on a year-to-year basis, over a 40-year period, they're apt to go higher.

The takeaway? If you don't have access to a 401(k) for retirement savings, fear not. If you manage your IRA wisely and aim to max out your contributions every year, you can accumulate a very nice amount of money for your senior years.

Remember, many people who have a 401(k) don't come close to maxing out their contributions on an annual basis. So if you're "stuck" with an IRA, don't sweat it -- and don't assume that retiring wealthy isn't in your future.

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