How much have you saved in your 401(k)? If you had maxed out your 401(k) contribution every year since you started working, you would have a good size retirement portfolio by now. However, if you are like the average American worker, your retirement account balance is woefully inadequate. About half of all households age 55 and older have no retirement savings so it’s not useful to compare your own retirement savings to the average. Let’s look at the people who are really saving for retirement instead.
The median value of retirement accounts for families with savings are still low. Even if you have $150,000 saved for retirement, that will translate to very little retirement income. Using the 4% safe withdrawal rate, that $150,000 will generate only $6,000 per year or just $500 per month. The average retiree household would need a lot of help from Social Security, pension, or other sources to have a comfortable retirement.
Luckily, I’m not average and our readers aren’t either. We have been maxing out our 401(k) for many years now and our retirement accounts is in a much better shape than the median value for our age group. My question is – what if you maxed out your 401(k) contribution every year? Let’s figure out how much retirement savings someone would have if they maxed out their 401(k) contribution as soon as they started working.
Maxed out 401(k) every year
Note: In our scenario, I have our worker contribute the max contribution divided by 12 on the first of every month. To make it simple, we’ll invest in VFINX, Vanguard S&P 500 index fund. I used VFINX’s price on 12/2/15 to figure out the 401(k) total (green line below.)
Here is how to read this graph. The horizontal axis is how many years you have been working. If you started working in 2005, then that’s 10 years you could have maxed out your 401k (from 2005 to 2015.) If you contributed the max every year, then you could have around $280,000 in your 401(k) account by now.
I’ve been working since mid 1996 so that’s 19.5 years. If I maxed out every year and invested in VFINX, then I should have around … $573,000 by now. I’m actually closer to 19 than 20. I have 528,795 in my 401(k). I didn’t max out my contribution when I started working so I was behind for a while. I have been contributing extra to my i401(k) these last 3 years so that helped me catch up a bit. Nothing beats investing while you’re young, though.
Where are you?
Here is the full table. It’s very easy to use. You just need to look at the first column and find the number of years you’ve worked. The Accumulated Value column will show how much your 401(k) would be worth if you’ve maxed out your contribution right from the beginning. The 3rd and 4th columns just show the corresponding year’s max contribution.
*I put this table on Google Spreadsheet. You can click on this link to see it. Unfortunately, the formula did not carry over from Excel. Let me know if you see any mistake.
It’s clear that by maxing out your 401(k), you will be much better off than the average household. If you started working in 1988 or 1989, you would be a 401(k) millionaire by now. I love my 401(k) and I can’t wait for it to hit 7 figures someday.
I didn’t even add any company matching to this. With company matching, your 401(k) balance should be quite a bit higher than my table here. Now that I mention company matching, I wonder why my total isn’t higher. I guess the first few years were really crucial and I didn’t max out those years. Also, I worked less than half a year in 1996 so I didn’t contribute much that first all important year. At that time, I didn’t know you could max out your 401(k) contribution even if you only worked less than half a year. If I could go back, I would definitely carve out $9,500 and contribute the max. If you’re young, you should try your best to max out your 401(k). It’s the optimal time to invest.
You can also see the magic of compounding on this table. If you contributed $7,313 in 1988, it would have turned into $99,457 today! ($1,162,299 – $1,062,842.) Wow, that’s a fantastic increase. Time is a huge factor when it comes to long term investment.
Max out your 401(k)
Of course, every 401(k) plan is different. Your retirement plan might not have very good investments or your fees might take a big bite out of your total return. If you don’t know how much fees you are paying then you should join Personal Capital and try their 401(k) fee analyzer tool. Generally, I think it’s worth maxing out your 401k contribution every year. You will pay less tax and you won’t leave any employer matching on the table. The contribution is auto deducted so you don’t even miss the money. The magic of compound interest will supercharge your 401(k) and help ensure a comfortable retirement.
How is your retirement account compared to this table? Are you ahead or behind?
If you need help keeping track of your finances, try using Personal Capital to manage your portfolio. They have great tools including the 401k fee Analyzer and one of the best retirement calculators on the internet.
This article was updated on December 3rd, 2015.