Do You Need to Max Out Your 401(k) Every Year to Retire a Millionaire?

If you have access to a 401(k) plan through your employer, you have a prime opportunity to sock away a nice amount of money for retirement. That’s because 401(k)s come with generous contribution limits — much higher limits than IRAs.

Right now, 401(k)s max out at $19,500 for savers under 50 and $26,000 for those 50 and over. In 2022, these limits will increase by $1,000 so that younger savers can sock away up to $20,500 and those 50 and over can set aside up to $27,000 for retirement.

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But what if you only earn an average income? If that’s the case, you might struggle to max out your 401(k), and understandably so.

In fact, as a general rule, workers are advised to sock away 15% to 20% of their earnings for retirement. If you earn $60,000 a year, hitting the 20% mark means parting with $12,000, which is a respectable sum to save, but a far cry from the maximum allowable 401(k) contribution.

The good news, however, is that you don’t need to max out your 401(k) year after year to retire with plenty of wealth. All you really need to do is consistently fund that account and invest your money wisely.

A much easier path

It may be possible to max out your 401(k) by cutting back on spending and making big sacrifices, like never taking vacations. But if you give yourself a lengthy savings window, that may not be necessary.

Imagine you’re able to begin funding your 401(k) at age 25 with the goal of retiring at age 70. (If that seems late, keep in mind that Americans are living longer these days, and so leaving the workforce at 70 is far from unreasonable). That gives you 45 years to build yourself a nest egg.

Now, let’s imagine that you’re able to sock away $500 a month in your 401(k) during that 45-year period. Let’s also assume that you invest your savings aggressively in the stock market so that you’re able to generate an average annual 8% return (which is a few percentage points below the market’s average).

If you stick to that plan, you’ll end up with a 401(k) balance of a little over $2.3 million. And you’ll have done so without getting anywhere close to maxing out your 401(k).

Try your best but limit your stress

To be clear, there’s nothing wrong with aiming to max out your 401(k) plan contributions year after year. Doing so could really help you amass a heaping pile of wealth, all the while shielding more of your income from near-term taxes, assuming you save in a traditional 401(k) and not a Roth 401(k).

But if you can’t manage to max out your 401(k) most years, or even any given year, don’t sweat it. You don’t actually need to max out your contributions to retire very wealthy. You just need to give yourself a long enough savings window to compensate for smaller contributions, and invest aggressively enough to grow that money into a much larger sum.

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