Maxing out your retirement accounts is a tall order, even for motivated savers. But if you want to improve your retirement readiness in a hurry, it's one of the best ways to do it.
It can be difficult to give up a large chunk of your hard-earned cash now, but the future earnings you could wind up with make it well worth it. Let's look at how much you can save in 2023 and what it could be worth in the long run.
401(k) contribution limits for 2023
In 2023, you're allowed to contribute up to $22,500 to a 401(k) if you're under 50 or $30,000 if you're 50 or older. This is up quite a bit from the 2022 limits of $20,500 and $27,000, respectively.
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These limits indicate the maximum you can contribute to your 401(k) without incurring government penalties. But if your employer offers a matching contribution, it's possible to get even more. The max is $66,000 for combined employee and employer contributions in 2023. Since every matching formula is different, though, it's difficult to predict how much extra this will net you. So for the following example, we'll presume you don't receive any employer match.
If you made the maximum 401(k) contribution in 2023, here's how much it would be worth after 5, 10, and 20 years, assuming you earned a 10% average annual rate of return:
|
2023 401(k) Contribution |
Balance After 5 Years |
After 10 Years |
After 20 Years |
|---|---|---|---|
|
$22,500 |
$36,236 |
$58,359 |
$151,369 |
|
$30,000 |
$48,315 |
$77,812 |
$201,825 |
Source: Calculations by author.
The above figures assume you make a one-time contribution to your 401(k) and don't add anything to it in subsequent years. But if you make a habit of maxing out your 401(k) every year, things look even better.
Here's how much you'd have if you contributed the 2023 annual maximum every year over 5, 10, and 20 years and earned a 10% average annual rate of return over that time (the S&P 500 long-term average):
|
2023 401(k) Contribution |
Balance After 5 Years |
After 10 Years |
After 20 Years |
|---|---|---|---|
|
$22,500 ($1,875 per month) |
$144,697 |
$377,733 |
$1,357,475 |
|
$30,000 ($2,500 per month) |
$192,929 |
$503,644 |
$1,809,967 |
Source: Calculations by author.
And in all likelihood, if you were determined to max out your retirement accounts annually, you'd be able to set aside even more money in the future. Once you turn 50, you become eligible to make catch-up contributions. Plus, the government periodically increases the annual contribution limits to keep up with inflation.
IRA contribution limits for 2023
IRA contribution limits are significantly lower than 401(k) limits, but they also saw a boost in 2023. You can now contribute up to $6,500 to an IRA if you're under 50, or $7,500 if you're 50 or older. The following table shows what that could be worth after 5, 10, and 20 years, using the same 10% average annual rate of return as in our previous example.
|
2023 IRA Contribution |
Balance After 5 Years |
After 10 Years |
After 20 Years |
|---|---|---|---|
|
$6,500 |
$10,468 |
$16,859 |
$43,729 |
|
$7,500 |
$12,079 |
$19,453 |
$50,456 |
Source: Calculations by author.
As with our first 401(k) example above, this shows how much you'd have if you maxed out your IRA in 2023 and then didn't contribute to it again in subsequent years. The table below shows how much you could wind up with if you made a habit of contributing the 2023 max amount every year.
|
2023 IRA Contribution |
Balance After 5 Years |
After 10 Years |
After 20 Years |
|---|---|---|---|
|
$6,500 ($542 per month) |
$41,827 |
$109,190 |
$392,401 |
|
$7,500 ($625 per month) |
$48,232 |
$125,911 |
$452,492 |
Source: Calculations by author.
Again, this is based on current contribution limits. But it's highly likely that these will rise again in the future. So it might even be possible to set aside more money for retirement than our estimates above.
What if you can't afford to max out your retirement accounts?
Even if you can't afford to max out your retirement accounts this year or in any year, it's still possible to retire comfortably while never coming close to the above monthly or annual contributions. What matters more is consistency.
Figure out how much you can afford to set aside each month for retirement and make it a habit. Whenever possible, automate your contributions so you don't have to remember to make them on your own.
If you have a 401(k), you can request that a certain percentage of each paycheck goes directly into the account. And many IRAs enable you to set up automatic transfers from a bank account on a schedule.
If you're not happy with how much you're saving right now, aim to increase your contributions by 1% of your income each year if you can. And try to avoid taking money out of your accounts before you retire.
If you do all of this, you should be able to make steady progress toward your goal over time.
