Maxing Out Retirement Accounts: How Rich Could You Be?

Everywhere you look, experts are telling you to contribute to your retirement accounts. Whether it’s advice from newspapers, blogs, financial planners, or friends, any advice that is worth taking must include planning for retirement. Why? Because it’s that important!

Over time, setting aside a small portion of your monthly income can mean the difference between living a comfortable retirement and not being able to retire at all. But how much should you put away?

One of the most common rules of thumb is to stick 10% of your income into a retirement account. If you have a work-sponsored plan, like a 401(k), you should always invest enough to at least meet your company match. But again, these numbers are a bare minimum for retirement savings. Why not save more if you can?

While the advice to save for your retirement is certainly sound, few people actually consider what saving more could mean for their future. Why stop at saving 10%? Why not save 15-20%? Heck, what would happen if you got really aggressive? How rich could you be if you actually maxed out your retirement accounts each year? Let’s take a look!

2017 IRS Contribution Limits for 401(k) Plans and IRAs

Every few years, the Internal Revenue Service adjusts the total amount of money that you are allowed to place into your retirement accounts. Contribution limits have remained flat again for 2017, holding steady for yet another year at $18,000 for 401(k) plans and $5,500 for IRAs. In addition, the IRS allows taxpayers who are 50 and older to make “catch-up” contributions. These allow an additional $6,000 contribution for 401(k) plans and $1,000 for IRAs, respectively. We can expect these limits to increase in the future, although it is not certain when that will happen.

Our Assumptions

That being said, we need to make a few assumptions in order to calculate the amount of wealth we can build by maxing out our retirement plans. To begin, we’ll assume that we’re going to be making regular contributions only, so we will not be adding additional money for “catch-up” contributions.

Additionally, we’ll make all of our calculations based on the current contribution limits -- $18,000 for 401(k) plans and $5,500 for IRAs. Again, if history repeats itself, those limits will be increased in the future. (We won’t account for that here, though.) Furthermore, we’ll assume that our investments will compound on an annual basis. And, finally, we’ll need to assume a very conservative growth rate of 5%.

Maxing Out Your 401(k)

Using a free compound interest calculator, let’s take a look at 401(k) plans. First, let’s assume that you are currently saving $4,000 a year in your plan and have been doing so since you were 25years old. Based on our current set of assumptions, you would end up with just over $500,000 in your retirement account at age 65. Not bad, right? And had you started saving this much at age 20, you would end up with $670,740 by the time 65 rolled around. Better yet, if you can stick it out for just 5 more years, you’ll end up with $879,261 over a 50-year time period. As you can see, compound interest plays a huge role, especially over the last few years.

Related: The Power of Compound Interest

But, what if you get really aggressive? What if you take a page out of the extreme early retirement book, cut your spending to the bone, and max out your 401(k) account? Here’s what you’ll save:

After 10 Years - $237,722
After 20 Years - $624,946
After 30 Years - $1,255,694
After 40 Years - $2,283,115
After 50 Years - $3,956,677

Amazing, right? By maxing out your 401(k), you could save about $125,000 more in 20 years than you would have saved in 40 with just a $4,000 a month contribution. You’ll have over $3 million more over a 50-year period. That is definitely not chump change.

Maxing Out Your IRA

Of course, maxing out a 401(k) plan can seem totally out of reach for most individuals. It's much more feasible for someone to max out their IRA plan at $5,500 per year. If you did that, here's an estimate of what you'd end up with:

After 10 Years - $72,637
After 20 Years - $190,955
After 30 Years - $383,684
After 40 Years - $697,618
After 50 Years - $1,208,984

Again, you’ll notice the compound interest coming in strong toward the end. Your savings almost doubled over just the last 10 years. So, the longer you can hang in there, the better off your finances will be!

Maxing Out Both Your 401(k) and IRA Plans

Now, let's imagine that you have done extremely well for yourself and are able to max out both your 401(k) plan and your IRA. How much wealth can you build then?

After 10 Years - $310,359
After 20 Years - $815,902
After 30 Years - $1,639,378
After 40 Years - $2,980,734
After 50 Years - $5,165,661

Obviously, this type of money should provide you with a wonderfully comfortable retirement.

The Takeaway

Remember, these numbers are all for individual investors. Married couples can combine their retirement savings to increase their wealth-building power. So, while saving $18,000 a year by yourself may not be within reach, it could be achievable as a household.

Rather than deflate or discourage you, hopefully, these numbers will motivate you to save as much as you can for as long as you can do it. The power of compounding interest is real, and you can make it work to your advantage. The more you are able to save, the better off you’ll be in retirement.

More so than anything else, these numbers should be a reminder that putting money away for retirement is a long-term proposition. The earlier you start saving, the more success you’ll have. You have to play the long game with your focus firmly set on the future. If you ride the ups and downs of the market, save until it hurts, and remember to be patient, you could end up being extremely wealthy in the end.