The 401(k) is one of the best accounts available to save a significant amount for retirement. It has always boasted sizable contribution limits, allowing workers a convenient method to shield their income from taxes. Of course… those sizable limits mean not everyone maxes out their 401(k). The vast majority of people don’t contribute the maximum amount, which leads us to ask: what if you always maxed out your 401(k)?
What if You Always Maxed Out Your 401(k)?
We made a few assumptions for this article, including putting all of your money in a fund which tracked the S&P 500.
We tracked both the current account balance in a 401(k), as well as the Annual Return implied by the current balance and your total contributions. Finally, we tracked 401(k) balances based on starting in January of each year since 1982, with equal balances each month, and added a 3% employer match.
Great! And what did you find about 401(k) maxers?
We estimate that many early 401(k) maximizers are millionaires.
If you had started maxing out your 401(k) back in 1990 or earlier, you’d most likely be in the 7 figure club in that one account alone!
A roughly 57 year old worker who started contributing in 1982 would have a massive $2.2 Million portfolio, while even a roughly 35 year old worker who started maxing out a 401(k) in 2004 would have about $365,000.
As you can see, no matter what year you started your account, after a few years it was a tremendous deal. You not only built a tax-free reservoir of wealth, but also shielded all of those contributions and gains from State and Federal taxes!
What other 401(k) assumptions did you make?
- The math is for a maxed out 401(k) contribution divided evenly for 12 months
- We used our S&P 500 Reinvestment and Periodic Investment Calculator to do the math
- The fee estimates are inside the calculator; feel free to redo the math for your own assumptions!
- The current chart ends in March of 2016
- We started in 1982 because that’s when the 401(k) became popular (technically, it was around 4 years earlier)
- 1982-1986 had a $30,000 employee contribution limit – but we used the $7,000 limit of later years.
How did you compute employer 401(k) matches?
- We based all of the numbers on a 3% employer match (It’s estimated to be on average around 2.7%)
- We estimated you earned 2 times the personal median income, and guessed at 2015
- Most full time workers with degrees make more than the median, and are more likely to have 401(k)s
Who Maxes Out Their 401(k)?
We have made the case many times: you should always max out your retirement accounts, including your 401(k)!
Unfortunately, the vast majority of account holders do not maximize their 401(k) contributions. In 2014, Vanguard released a report quantifying just how rare it was for an account holder to maximize a 401(k): only 12% maxed their 401(k)s in 2013. That’s a low number, but it was actually an improvement from the 10% seen in 2012!
We’ve shared the history of 401(k) contribution limits before, and another benefit available to older workers is the ‘catch-up’ contribution. This allows account holder who are 50 years old or older to amp up their contributions, and contribute an additional amount to their accounts – a full $6,000 in 2016.
Unfortunately, the participation rates for catch-up contributions are also low: 14% in 2013, and 13% in 2012.
It’s not all bad news, though: in 2013, participants (including any employer match) averaged a contribution of 10.2%, which is healthier than the United States average savings rate!
What Are The Actual Average 401(k) Account Balances?
Unfortunately, looking only at 401(k) balances doesn’t tell the whole story.
One of the awesome features of 401(k)s is portability – when you leave a job, you are able to roll over your 401(k) into an IRA. This means that any study of 401(k)s will have a reverse survival bias – you’ll only see balances for people still with their current company, or who have chosen to not roll over their 401(k) into an IRA.
If you don’t mind those caveats, we can still tell a story, thanks to a Fidelity analysis of Q4 2015 balances.
- The average 401(k) balance was $91,300
- The average IRA balance was $92,200
Taking the two together as roughly $200,000, we estimate that, in theory, any maxed 401(k) account started before 2009 and invested in the S&P 500 would already be higher.
What Else Did We Learn From the Maxed Out 401(k) Study?
One of the features you can see in our chart is that we estimated annual return percentages if you always maxed out your 401(k), using the ‘equally divided by month’ method we explained in our assumptions.
We did this using a function called ‘XIRR’, which we built into our S&P 500 Periodic Investment tool. XIRR allows you to find out the actual return on money based on periodic investments, as opposed to ‘simple’ returns based on a lump sum up front. XIRR is a weighted average, so each month’s contributions matter in the final result.
From that, we find some interesting things about maxed out 401(k)s:
- Ignoring recent accounts, if you always maxed out your 401(k) starting in 2009, you’ve seen the best results out of any year: a huge 12.264% return!
- Maxed out 401(k)s that started in 1996 performed the “worst”… but still boast a very good 6.98% annual return.
- The median annual return if you always maxed out your 401(k) and started between 1982 and 2010 was 8.32%
- The average annual return if you consistently maxed your 401(k) and started between 1982 and 2010 was 8.55%
- If you always maxed out your 401(k), your leverage becomes massive after enough time – accounts started in 1982 have $2.2 million balances on only $400,000 in personal contributions!
Always Max Out Your 401(k)!
Some time back, we made a strong argument to always max out your 401(k)… but this study should solidify it: if you always maxed out your 401(k) you’d have a very healthy account balance, even if you always just stayed in stocks.
That includes all of the ups and downs – and sideways – moves inherent to investing in stocks has paid off for you if you’re maxing out annually. Just ignoring the fluctuations of the S&P 500 lead to these huge gains. (You can see what sort of returns the S&P 500 has with our convenient calculator.)
Nothing speaks louder than results. If you always maxed out your 401(k) you’ve got results in spades!
I hope this was enlightening and useful – we’ll consider it a success if you move your 401(k) contributions just a little bit closer to ‘max’ after you read this. Let us know what you decide!
Have you always maxed out your 401(k)? Even if you didn’t, how does your balance compare to the chart? Is maxing out your 401(k) a good strategy?