Here’s how much you’ll have if you max out your 401k plan

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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 (and financial coach) 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 2017 each person can contribute up to $18,000 to their 401k plan. Someone who is age 50 or older can contribute an additional $6,000 each year – for a total of $24,000.

This is per-person, so both members of a working couple can each contribute this maximum amount. That’s a total of $36,000 per year before age 50, or $48,000 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 $18k only impacts your take-home pay by $13,500. Yes, the $4,500 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 match averages to equal 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.

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 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 $18k 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 $2.3 million dollars. If this is a household with two working people who both contribute the maximum, they would retire with a balance of $4.6 million dollars.

Here’s the free way we track our net worth – try it out…

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 $184,000 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 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…

Do, 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?

 

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10 Comments

  1. Making Your Money Matter July 6, 2017 at 9:29 pm - Reply

    I’ve been wanting to re-run those numbers from that post as well, as we’ve not maxed out our contributions but still will have plenty and then some to retire even by 55. Great to see this-it would be discouraging for a lot of people to think that they may as well not try.

    • Brad Kingsley July 7, 2017 at 11:10 am - Reply

      Thanks for stopping by MYMM. One thing with us early-retirement people is you need to balance the 401k/IRA contributions with taxable account additions too. Otherwise your money is all tied up with penalties if you want to touch it before 59.5. Half taxable and half retirement account might be a better option for F.I.R.E. people.

  2. Grant @ Life Prep Couple July 8, 2017 at 1:54 am - Reply

    If you couldn’t retire in 40 years after contributing $18,000 per year then no one would ever be able to retire. Thanks for running the extra conservative numbers and putting this one to bed.

    • Brad Kingsley July 8, 2017 at 11:46 am - Reply

      Agreed Grant. Thanks for stopping by!

  3. Since my wife is looking at going into a part-time/half retired role, we have adjusted our 401k contributions quite a bit.

    We actually increased hers to get some extra dollars into her account before she leaves her job. It gives us more money that sits and grows for us long term. My contribution has gone down to 5%, which is equivalent to the max company match. The rest of my contributions have gone to the taxable account to build for the eventual FIRE goal.

    Thanks for sharing the post!

    • Brad Kingsley July 8, 2017 at 11:48 am - Reply

      That sounds like a good plan Cameron. Those of us with the FIRE plan need to consider being able to access our money before 59 1/2. Rather than focusing on the 401k, the more important point is the overall savings amount for sure.

  4. Brad with no blog to promote August 3, 2017 at 6:49 pm - Reply

    I ran the numbers for my situation a couple of years ago and found it promising as well. By age 60, we’d have $2.5M in just retirement accounts! I was pretty fired up, and we’ve been on the path for two years now.

    • Brad Kingsley August 4, 2017 at 11:41 am - Reply

      Awesome Brad! Stay focused and enjoy that comfortable retirement in the future! 🙂

  5. Susie September 8, 2017 at 1:01 pm - Reply

    Forgive my grumpies…but when you are low-income and earn $25 K per year, this is pretty unrealistic. I appreciate the emphasis on what a person CAN do, and of course, everyone, even low-incomers like us, can do something toward retirement (and I do). I just see more and more how one’s opportunities are abundant–when one has the capital; and how one’s opportunities are miniscule when the disposable income is miniscule. It is a constant struggle for those who do not have large amounts of money that can be shuffled around.

    • Brad Kingsley September 8, 2017 at 2:57 pm - Reply

      Susie – no problem on the grumpies! You’re absolutely right, someone making $25k can’t come anywhere near maxing out a 401k. It just isn’t reasonable. The good news is that someone living on $25k doesn’t need as large of a nest egg either, so they don’t have to save as much dollar-wise. Really, what is most important is the percentage of money saved. Check out the retirement chart in this post.

      Now, honestly, saving anything is tough at $25k. I understand that for sure. So please don’t take this as belittling the situation. Saving something instead of nothing is a great start, but working to increase the income would go a long way too. Maybe a side hustle like an online job, or driving for Uber, or even delivering pizzas a couple of days per week. It’s possible to make $1000/month for sure – giving an almost 50% bump in annual income.

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