Experts: Most Americans Don’t Max Out Retirement Contributions — Why You Should
Written by
Jordan Rosenfeld
Edited by
Levi Leidy
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
It can be hard to know exactly how much you’ll need for retirement, even when you try to calculate the expected years multiplied by your current income or lifestyle needs.
Retirement experts recommend people save a minimum of 10% to 15% of their pre-tax income each year to have the best shot at a comfortable retirement. Yet, according to a 2024 GOBankingRates survey, only 11% of respondents are saving 10%, fewer than 6% of respondents are saving 15% and less than 3% are saving 20% or more.
It Takes Full Advantage of Compound Interest
Mike Kojonen, founder and owner of Principal Preservation Services LLC, said the most compelling reason to max out retirement contributions is the power of compound interest.
“For example, assume you consistently max out your 401(k) from age 30. The difference in your retirement fund’s growth compared to starting at age 40 can be staggering, often to the tune of hundreds of thousands of dollars, depending on the market’s performance and your specific contributions,” he explained.
This difference primarily results from the additional decade of earnings accruing interest, which then itself earns interest.
You Can Make Catch-Up Contributions
For those aged 50 and above, you have an opportunity known as a “catch-up contribution,” which Kojonen calls “an invaluable tool seldom fully utilized.”
These contributions allow pre-retirees to contribute beyond the standard limits to their retirement accounts.
“For instance, in 2024, individuals 50 and older can contribute an additional $7,500 to their 401(k) beyond the standard contribution limit,” he said.
This not only helps in closing the gap for those who started saving for retirement late, but also maximizes tax advantages in those peak earning years.
You Can Create Tax-Free Earnings
Another way to max out your contributions is to use a Roth IRA, Kojonen said. “The tax-free withdrawal benefit of a Roth IRA in retirement can significantly enhance your financial stability in those years. Opting for a Roth when you’re in a lower tax bracket, particularly early in your career, can lead to tax-free earnings on your contributions for decades.”
You Can Lower Your Taxable Income
Another excellent reason to max out contributions to retirement accounts like 401(k)s or IRAs is that you can actually lower your taxable income, according to Rhett Stubbendeck, CEO and founder of Leverage Planning.
“That means more money in your pocket now. For example, let’s say you make $60,000 a year and contribute the maximum allowed amount of $23,000 to your 401(k). You’ll only be taxed on $37,000, saving you a nice chunk of change.”
You Can Earn Free Money
Some employers may also offer matching contributions to retirement accounts, as well, Stubbendeck said. “So, by maxing out your contributions, you’re basically saying, ‘Yes, please’ to free money.”
For example, if your employer matches 50% of your contributions up to 6% of your salary, and you make $50,000 a year, that’s an extra $1,500 in your retirement account just from the employer match, he explained.
“The sooner you start contributing, the more time your money has to grow. It’s like planting a money tree that gets bigger and bigger over time. Also make it super easy on yourself by setting up automatic contributions from your paycheck. That way, you won’t even have to think about it.”
You Can’t Ever Save Too Much
John Stevenson, CFF, a retirement planner and expert contributor for Annuity.org, pointed out that, “When it comes to investing and saving for our future retirement goals, it would be reasonable to say that no retiree has ever complained of saving too much. Most say that they wish they had sacrificed more earlier and contributed more during their earning years so that their current retirement was much better.”
He has found that investing in annuities, in particular, allows people to to earn more for their guaranteed income benefit later on.
“Many of these contracts offer 7% or more in guaranteed annual growth for a solid stream of income later. Another opportunity that a nonqualified annuity would provide is also the freedom to contribute an unlimited amount per year versus a very limited amount other qualified retirement accounts allow for.”
Keep This Caveat in Mind
All of that said, Kevin Thompson, CFP, RICP, founder and CEO of 9i Capital Group LLC, warned that while you should definitely max out your retirement contributions, you shouldn’t do so to the detriment of liquid savings.
“I always prefer to max out liquid emergency savings prior to investment. Once that is complete, maxing out your qualified plans is crucial due to the forced savings nature. We ask our clients to put typically up to the matched percentage inside of their qualified accounts while also saving in outside retirement accounts if feasible,” he said.
More From GOBankingRates
