Here’s How Much You Could Have By Maxing Out Retirement Savings (2024)

Saving for retirement is simple. It’s simple to set money aside in a 401(k) or IRA. It’s also simple to invest it in a diversified, three-fund portfolio. As simple as retirement saving is, however, it’s not always easy.

When you’re just starting out, the idea of building a six- or seven-figure retirement fund is daunting. It can seem impossible to turn an average income into a large retirement portfolio.

The good news for young savers is that time is on your side. In fact, just maxing out an individual retirement account (IRA) can put you on the right track to a comfortable retirement. And even those who start later can benefit from years or decades of compound returns to help them reach their retirement goals.

To demonstrate this, we’ll look at just how much money you could accumulate if you maxed out your retirement accounts. We’ll assume that you start saving for retirement at age 25 and retire at age 70, but we’ll also look at scenarios for those who start later. Let’s start with an IRA.

Maxing Out an IRA

The contribution limit for IRAs in 2020 and 2021 is $6,000. Those 50 or older can contribute an extra $1,000, but we’ll keep things simple by sticking with the $6,000 contribution limit. We’ll also assume that the limit never goes up, even though it does based on inflation. Finally, we’ll assume a 5% after-inflation return on our investments.

If we max out an IRA at $6,000 a year from age 25 to 70 based on these assumptions, we retire with just over $1 million. Keep in mind this is assuming an after-inflation return of 5%. That is an important assumption. If the after-inflation return is 4%, our total goes down to $757,000. If it’s 6%, the total jumps to $1,388,000. We’ll continue to assume a 5% return going forward.

There is an important aspect of this $1 million portfolio that shouldn’t be overlooked. While the account grew to more than $1 million, the contributions amounted to just $270,000 ($6,000 x 45 years). In other words, compounding accounted for more than two-thirds of the final account balance. This is how someone making even an average income can still build a sizable retirement nest egg.

Maxing Out a 401(k)

The contribution limits for 401(k) and similar workplace retirement accounts are higher than those for IRAs. In 2020 and 2021, the contribution limits for those younger than 50 is $19,500. As with IRAs, this limit goes up most years by the rate of inflation, but we’ll assume it never goes up in our calculations.

With the much larger contribution, our total balance grows to more than $3,310,000 after 45 years, and it would be even larger with an employer match. A common match is $0.50 for every $1 contributed by the employee, up to 6% of salary. Including this or similar matching contributions could increase the total balance at retirement by $500,000 or more.

As with the IRA, the majority of the final account total comes from compounding. In this case, contributions amounted to $877,500 over 45 years while almost $2.5 million came from compounding returns.

At this point, some may object that most people in their 20s can’t max out an IRA, let alone a 401(k). We’ll come back to that, but first let’s look at maxing out both an IRA and 401(k).

Maxing Out Both an IRA and 401(k)

For those high achievers, maxing out both an IRA and 401(k) over a career will generate substantial wealth. Using the assumptions above, a total annual contribution of $25,500 (IRA + 401(k)) generates about $4,329,000.

To highlight the power of compounding, let’s consider again the changes in our balance if we make “small” adjustments to our 5% return assumption. Moving it down to 4% lowers our ending balance from slightly more than $4 million to just over $3 million, a 25% decline. Likewise, if we increase the returns to 6%, the ending balance jumps to almost $5.9 million. This math alone should tell you all you need to know about the destructive power of “just” a 1% advisor fee or the impact of high investment expense ratios.

How to Grow a Retirement Fortune When You Can’t Max out Accounts

Now let’s mix in a bit of reality. Many people in their 20s or even 30s either can’t max out retirement accounts or have other financial priorities, like paying down debt, buying a home or saving for a child’s education. To acknowledge that, let’s assume that one doesn’t start saving for retirement until age 35. That reduces our time to retirement to 35 years.

The first thing to recognize is that a 10-year delay in retirement savings has a significant effect on the outcome of our portfolio, assuming the same contribution rate and returns:

• IRA: $571,000, down from $1 million

• 401(k): $1.85 million, down from $3.31 million

• IRA and 401(k): $2.42 million, down from $4.33 million

In other words, a 10-year delay cut the portfolio almost in half. While you still end up with much more than you originally contributed, it’s clear the early years matter.

If you can’t max out your retirement accounts early in your life, strive to save as much as you can for retirement as early as possible. Saving even smaller amounts can go a long way to establishing a financially secure retirement. If your employer offers a retirement match, you should aim to contribute at least enough to qualify for the full employer contribution.

Now, let’s see what happens if you start saving a smaller amount, like $3,000 a year, at 25. Then, once you’re more established and financially secure, you begin maxing out your IRA, 401(k) or both at the age of 35:

• IRA: $795,000, up from $571,000 if you waited to start contributing anything until 35

• 401(k): $2.08 million, up from $1.85 million

• IRA and 401(k): $2.65 million, up from $2.42 million

In other words, the extra $30,000 saved over the initial 10 years translated into $200,000 or more at retirement.

Final Thoughts

Retirement accounts give us an opportunity to save for our golden years in a tax-advantaged account. If you start early, the power of compounding can turn relatively modest monthly or annual contributions into life-changing wealth.

Even if you can’t max out an IRA or a 401(k), starting with much smaller amounts can still put you on the right track to retirement savings. And if you weren’t able to start contributing in your 20s, starting now with what you can positions you to benefit from compounding for the years or decades that sit between you and your retirement.