Only 12% of 401(k) Participants Are Doing This to Get Ahead in Retirement

For the majority of people, simply putting money toward savings won’t be enough to ensure they can live comfortably in retirement without any extra income — investing those savings is a necessity. A 401(k) account is one of the best ways to save and invest for retirement. By putting aside pre-tax money, you’re able to not only grow your nest egg but also lower your taxable income.

While many people contribute to a 401(k) plan, relatively few max out their contributions. Here’s why you should.

The more you contribute, the better

Each year, the IRS sets the maximum contribution limits for retirement accounts. For tax year 2022, the maximum amount you can contribute to a 401(k) plan is $20,500 ($27,000 if you’re 50 or older), up $1,000 from the previous year. In 2020, Vanguard found that only 12% of 401(k) plan participants maxed out their annual contributions.

Of the 12% who did so, 56% had an annual income over $150,000, and only 11% were 34 years old or younger. While it may not be possible for everyone to max out their contributions — considering it would require over $788 in biweekly contributions — those with the means should strongly consider it to put themselves ahead for retirement.

At least contribute your employer’s match

Many employers that offer 401(k) plans will also provide matching contributions as an added benefit, usually a set percentage. For example, if you contribute 3% of your salary, and your employer matches that 3%, it’ll be as if you contributed 6% of your earnings.

So even if you don’t currently have the means to max out your contributions, you should at least be contributing enough to your 401(k) plan to maximize your employer match — it’s essentially “free” money. Your future self will be thankful in retirement as you’ll see below.

The path to becoming a millionaire

The average U.S. retirement age is 62, and a good rule of thumb is to have around 80% of your pre-retirement annual income available to maintain your lifestyle. For example, if you earned $100,000 annually, you’d want to have $80,000 coming in during retirement, meaning you’d need at least $1 million to sustain that level of yearly income. If you were to max out your 401(k) contributions, here’s how long it would take you to build up a nest egg that size:

Yearly Contributions
Annual Return
Plan Fees
Years Until $1 Million
$20,500
10%
2%
21
$26,500 (including 6% employer match)
10%
2%
18
$27,000
10%
2%
18
$33,000 (including 6% employer match)
10%
2%
16

Calculations by author.

By comparison, here’s how much you’d have in your 401(k) if you only saved the yearly contributions instead of investing them:

Yearly Contributions
Years
Amount Saved
$20,500
21
$430,500
$26,500 (including 6% employer match)
18
$477,000
$27,000
18
$486,000
$33,000 (including 6% employer match)
16
$528,000

Calculations by author.

The matching contributions from your employer may only total about $50,000 in this scenario, but with the help of compounding earnings from your investments, that’s enough to shave off years from how long it takes to reach your savings goal.

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