When saving for retirement, it can often feel like you're making little progress toward your goal. You expect you'll need six or seven figures to retire comfortably but you may only be able to set aside a couple hundred dollars -- or even less -- each month.
But what this picture doesn't account for is the earnings on your investments. These can go a lot further than you think. To show you what I mean, let's consider the example of $10,000 invested in your 401(k) for 20 years.
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Here's what your $10,000 could be worth in 20 years
A $10,000 401(k) balance today doesn't seem like it would go very far in retirement, but a lot depends on how long you have until you need to withdraw your cash and what kind of return you earn. The greater your rate of return and the longer you leave your cash invested, the more you'll have by retirement.
For our example, let's say you invest $10,000 in a 401(k) today and you aim to withdraw it in 20 years. While it's invested, you earn a 10% average annual return. After two decades, your $10,000 would be worth $67,275. That's enough to cover a couple years' worth of retirement expenses for most people, especially when paired with Social Security benefits.
You could wind up with even more if the $10,000 you contributed to your 401(k) on your own earned you a company match from your employer. This could potentially add hundreds or thousands of dollars to your 401(k) balance today, which could grow to be worth tens of thousands of dollars or more in a few decades.
How to maximize your 401(k)'s growth
There's no way to guarantee that you earn a 10% average annual return, so your actual balance over 20 years could be different than in the example above. Some factors influencing returns, like how the economy is doing, are beyond anyone's control. But there are things you can do to grow your 401(k) balance more quickly.
First, avoid leaving any of your 401(k) match on the table if you can. Try to contribute at least enough to get the full match each year unless you cannot afford to lose any money from your paychecks. Talk to your employer if you're unsure how its matching formula works or how much you have to set aside to claim your full match.
Next, review your investments. Most 401(k)s give you a choice between various mutual funds. These are bundles of investments you purchase as a package. They charge annual fees known as expense ratios, and some can be quite high. Generally, you want to avoid paying more than 1% of your assets per year for an expense ratio. That's $1 for every $100 you have invested in the fund.
Index funds are a great choice if they're available to you. These are low-cost investments that spread your money around between many companies so your portfolio isn't too dependent on any one in particular.
Next, focus on your contribution rate. Think about how long you have until retirement and how much you believe you'll need to save to determine what you need to set aside each month. If you're not able to save as much as you'd like right now, do what you can. Whenever possible, increase your contributions by 1% of your salary per year until you reach your target savings rate.
Finally, be careful of the annual contribution limits. In 2024, adults under 50 can only contribute up to $23,000 to a 401(k). Adults 50 and older may contribute up to $30,500. Exceeding these limits can bring costly tax penalties, so keep a close eye on your contributions throughout the year to make sure you don't set aside too much.
