How Much Money Could Your 401(k) Earn You if Maxed Out?

In your retirement savings plan, a 401(k) can be a useful tool. If you constantly take full advantage of its benefits, you should be in good shape when you reach your golden years. Employers who provide such accounts will be able to contribute up to $19,500 in 2021.

Over the years, the government has steadily increased the yearly 401(k) contribution limit, and it is likely to do so in the future. However, presuming the maximum individual contribution in 2021 of $19,500, here is how much you may amass in the long term by maximizing your contributions to this tax-advantaged retirement plan.

 

How it could increase 

If you contributed the maximum amount allowed by law to your 401(k) for 30 years and had an average yearly rate of return of 7%, your account balance at the end of that time would be $1,970,924.

With an annualized rate of return of 8%, that would increase to $2,385,744, and with a rate of return of 9%, it would increase to $2,897,217. A ten percent average rate of return would bring you $3,528,397.

Investors should not be surprised to see such high rates of return. According to a model developed by the investing firm Vanguard, portfolios made up of 20% stocks and 80% bonds gained an average of 7.2 percent per year between 1926 and 2020. A 40 percent stock allocation increased the annual return to 8.2 percent, a 60 percent stock/40 percent bond split increased it to 9.1 percent, and an aggressive 100 percent stock allocation returned 10.1 percent on average. However, the more your portfolio's stock exposure, the greater the risk. Increasing the percentage of stock in addition to the number of years in which the average portfolios lost value increased the amount of the losses during their worst years.

 

 

Tolerance of Risk

 

Many factors determine how comfortable you are with financial risks. However, one of the most significant factors to take into account is your time horizon or when you intend to start using the money you're investing. The closer you get to withdrawing money from your retirement accounts, the less time they have to recover from potential market downturns and bear markets. As a result, investing largely in stocks in your 401(k) later in life may force you to sell beaten-down securities to pay your obligations, thereby locking in your losses.

 

Investors approaching retirement might avoid this by progressively increasing the portion of their portfolios devoted to safer investments, such as bonds, while decreasing their stock exposure. However, the lowered risk will almost certainly come at the cost of a lower return on investment. It's critical to account for the slower growth in your long-term strategy to avoid falling short of your financial goals.

 

If you are unable to max out your 401(k) each year

Surely, for most people, reaching the yearly 401(k) contribution limit every year will be an unattainable ambition. Many people may never reach the level of financial flexibility to do it even once in their working life.

Still, if you do it for as long as you can, you might be able to retire in a reasonably comfortable position.

For instance, if you don't begin investing for retirement till you’ve reached the middle of your career, but then contribute the maximum amount to your 401(k) every year for twenty years at a 7% annual rate of return, you'll end up with a portfolio with a value of $855,371. That would rise to $963,747 with an 8% rate of return. Your account would increase to $1,087,408 with a 9% annualized return and to $1,228,549 with a 10% annualized return.

 

Retirement objectives that are attainable (and a vital bonus)

Even if you reach the limit for your 401(k), it's a good idea to contribute to it as much as possible for as long as you can. Regardless of how much you put aside, it will still undoubtedly enhance your financial status in retirement when compared to setting nothing aside. Relying only on Social Security will not provide a comfortable standard of living.

And, as you're presumably aware, most 401(k) plans include company match programs, which match your contributions up to a certain percentage of your pay. For example, if you earn $60,000 per year, and your workplace offers a 4% dollar-for-dollar matching program, your employer will pay up to $2,400 to your 401(k) each year if you match. That means you might have a total contribution of $4,800 for the year. If you do that each year during a 30-year period at a 7 percent annualized rate of return, your portfolio would have a value of $485,152. That amount would increase to $587,260 at an 8% rate of return, $713,161 at a 9% rate of return, and $868,528 at a 10% rate of return.

Finally, there's an advantage that these accounts provide that can assist you if you got a late start on your retirement planning. The IRS allows you to contribute an extra $6,500 to your 401(k) after you reach 50. That can help make up for years when you weren't able to save as much as you would have liked. Seizing the opportunity that the catch-up contribution offers every year they meet the criteria would contribute an additional $214,494 to the value of their portfolio at a 7 percent average rate of return. Further, $236,927 at 8%, $261,959 at 9%, and $289,895 at ten percent for someone aiming to retire at 67.

 

Even if you can't max out your 401(k) every year, if you have one, it could be one of the most effective ways for you to save for your retirement. By regularly contributing as much as you can to this tax-advantaged account, it might become your most valued asset by the time of your retirement.