I read a post recently where someone said that even if you max out your 401k plan over your earning years, you wouldn’t have enough money to retire. Is that true? I hadn’t ever really considered the question before so I wasn’t sure. Rather than just take this person’s word for it, I did what any personal finance geek would do – I ran the numbers.

How much you'll have if you max out your 401k plan

How much can you contribute to your 401k plan?

For the year 2023, each person can contribute up to $22,500 to their 401k plan. Someone who is age 50 or older can contribute an additional $7,500 each year – for a total of $30,000.

This is per person, so both members of a working couple can each contribute this maximum amount. That’s a total of $45,000 per year before age 50, or $60,000 per year from 50 onward.

Keep in mind it doesn’t cost you that much

That sounds like a lot of money, doesn’t it?

Don’t forget that 401k contributions are pre-tax. So if you are in the 25% marginal tax bracket, that $22.5k only impacts your take-home pay by $16,875. Yes, the $5,625 you would have paid in taxes goes into the investment account, and enjoys the power of compounding with all the rest of your money!

How about company matches?

Investopedia states that the average 401k company matches averages equal to about 2.7% of a person’s income.

That in itself can have a tremendous impact on the growth of your investment account over an extended period of time!

But… not everyone gets a match. Additionally, different companies have different match policies. So rather than assuming everyone has the same benefit there, I’m going to exclude that amount from my calculations. If you’re getting a match at work – just know that you’ll have even more money at retirement.

What return might be reasonable in your 401k investments?

The point of this exercise is to determine if someone can contribute the maximum to their 401k over their entire earning years and have enough to retire. That being the case, what we care about is how the market tends to perform (has performed in the past) over most 40-year periods.

For my example, I’m looking at an aggressive portfolio that invests in an S&P 500 index fund.

40-year rolling stock market returns

We can see from looking at this historical 40-year rolling return chart that the vast majority of 40-year periods produced average annual gains between 6% and 12%.

Read: What are stock market rolling returns and how are they useful?

I looked at the background data and confirmed that every single 40-year period fell somewhere between 4.9% and 13.1%, with the average annual return [for the S&P500] over the period being 9.342%.

Don’t forget inflation

Inflation knocks off almost 3% from those returns though. So while you might get 9% average annual returns, the purchasing power at the end will feel more like a 6% return.

While I think 6-7% is a very reasonable estimate for returns after inflation, I’m going to get even a bit more conservative and use 5% for my calculations in this article. I can’t stand when people over-inflate returns just to get big numbers, so I don’t want to be accused of the same thing.

How much will be needed to retire?

I did an entire previous post on this (read:How much money do you need to retire?). Here’s a quick answer – for most people the target will be about 25 times your current annual spending. This assumes you retire at age 65 and withdraw 4% of your investment balance each year.

Read:What is the 4% rule and how can it help your financial planning?

How big might the 401k balance grow?

Let’s say you invest the maximum of $22,500 as soon as you start earning full-time income – let’s round to age 25 – and continue this until age 65. You have a pretty good chance of earning 7% as noted above, or we can estimate 5%/year after accounting for inflation.

How much money would you have? A single person following this plan would amass about $2.8 million dollars. If this is a household with two working people who both contribute the maximum, they would retire with a balance of $5.6 million dollars.

Remember, that’s already after accounting for ~3%/year in inflation. So that would be the equivalent purchasing power of the same amount in today’s dollars.

NOTE: The actual investment balance would be a lot higher than these numbers. What we really care about is purchasing power in retirement. That’s why we back out inflation. It will “feel” like you have this much money at retirement (even though you have more in actual dollars).

How much annual retirement spending would that allow?

Using the 4% rule this couple could withdraw $224,000 each year with an extremely high chance of never running out of money. I don’t know about you, but I know that I sure could retire and live comfortably on that much money!

And what if Social Security is still around and they start collecting at their full retirement age? That could easily push them past $200k/year of money available for spending.

Read:How to estimate your social security benefits for retirement

So, can someone save enough to retire by maxing out their 401k plan? Yes, I’d definitely say that most people could! But I’d love to hear your thoughts…

So, what do you think? Do you have any questions about the calculations? Do you think YOU could retire on the amount invested by maxing a 401k account?