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Maxing out your 401(k) can go a long way toward helping you cover your retirement expenses, but it’s a feat few people actually achieve. It’s pretty challenging to set aside that much cash, especially since you usually can’t touch money you put in retirement savings until you’re at least 59 1/2.
Fortunately, you don’t have to max out your 401(k) every year — or even once — in order to enjoy a comfortable retirement. Here’s why.
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What does it take to max out your 401(k)?
For those who don’t know, you can contribute up to $19,500 to a 401(k) in 2021. This will rise to $20,500 in 2022.
Adults 50 and older are allowed to make an extra $6,500 in catch-up contributions each year. That brings their annual contribution limits to $26,000 and $27,000 for 2021 and 2022, respectively.
It’s not easy for most people to set aside $20,000 for retirement each year, and only those with high annual incomes are likely to do this. But the good news is, you probably don’t have to max out your 401(k) to afford the retirement you want.
How much should you actually save each year?
You need an idea of how much you must save for retirement in order to set an appropriate monthly savings goal. For simplicity’s sake, let’s assume your goal is to save $1 million of your own money, which you’ll supplement with Social Security and possibly a 401(k) match.
The amount you actually need to save each month depends on your investment rate of return and the length of time you have to save. Here’s a table showing how much you would have to save per month to reach $1 million over 20, 30, and 40 years, with different rates of return on your investments.
6% Average Annual Rate of Return
8% Average Annual Rate of Return
10% Average Annual Rate of Return
20 years to save
$2,195 per month
$1,747 per month
$1,382 per month
30 years to save
$1,022 per month
$706 per month
$481 per month
40 years to save
$522 per month
$309 per month
$179 per month
Data source: Author’s personal calculations.
As you can see, it’s possible to save enough for retirement without coming close to maxing out your 401(k). In the case of someone contributing $179 per month, that’s only $2,148 per year — barely more than 10% of the annual limit.
But that’s the best-case scenario, assuming a high average annual rate of return on your investments. While that’s certainly possible, you never know when a market crash could come along. If you’re banking on a high return rate to make up for your smaller contributions, you could wind up running short in retirement.
You’re better off focusing on the things you can control: how much you’re able to contribute and how much time you have left to save. Starting early can reduce your monthly savings goal significantly, as the table above shows. But not everyone is able to save as much as they ought to every month.
If not, you have a few options. First, you can try to alter your budget to free up more cash. This is ideal if you can afford to do so. Or you can delay your retirement. By waiting even a few months longer, you give your existing investments more time to grow, and you buy yourself a little more time to stash money away. You’re also shortening the duration of your retirement, which makes it more affordable.
There’s nothing wrong with having a goal to max out your 401(k), but you shouldn’t feel as though you failed if you didn’t meet it. Instead, focus on figuring out how much you actually need to save each month, and make that your goal. If something changes later, you can always revise it, but do your best to stick to your plan going forward.
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