The 401(k) may have become popular in the early 80s, but many people—whether in their working prime or just starting their career—never took full advantage of this important retirement savings tool. Now, many workers in middle age and older are taking stock of their retirement options, only to find the outlook seems bleak.
Studies from 2020 show that many older Americans have insufficient retirement savings. According to the St. Louis Federal Reserve, one-third of “near-retirees”—those aged 55 to 64—have neither a pension, a 401(k) plan, nor an employer-provided retirement savings plan. And those who do have a median of $88,000 saved.
On a more positive note, the St. Louis Fed estimates there was a 7% increase in retirees comparing October 2021 to January 2020. This may come as welcome news if you’re over 40 and think it’s too late to start saving for retirement. Luckily, there are sound strategies for older workers to increase their likelihood of retiring comfortably—and many of them start with a 401(k) plan.
The sooner you start saving, the easier it may be to reach your retirement goals
There’s a popular Chinese proverb that goes, “The best time to plant a tree was 20 years ago. The second-best time is now.” The same holds true for retirement savings.
If you have modest means or feel reluctant to decrease your take-home pay, 401(k) plans have a couple of attractive features that make getting started less painful and continuing even easier:
The money you contribute to a traditional 401(k) is made on a pre-tax basis, which reduces the taxes you’ll pay for the year. By saving money on your tax payments, you may be able to save more for retirement.
The power of compound interest may help you grow your nest egg. Compound interest occurs when you earn interest on your investment and it gets reinvested, leading to returns that increase over time.
Example: You’re 50 years old, plan to work until age 70, and have a savings goal of a quarter-million dollars. The historical average rate of return for 401(k)s has been between 3% to 8%—so we’ll use an average of 5.5% for this scenario. Using the Compound Interest Calculator from the U.S. Securities and Exchange Commission, if you make $60,000 per year (excluding any raises) and save 15% of your salary at $750 per month), at a 5.5% annual rate of return, you would exceed your savings goal with $313,814 at retirement.¹
Benefits of an employer 401(k) match
One of the top ways to make the most of your retirement savings is to utilize your employer match if offered. An employer matching of 401(k) contributions is a plan design in which employers contribute a specified amount to your plan based on your annual contributions. In short, an employer match is free money from your employer.
Luckily, the majority of U.S. employers offer some type of 401(k) match. According to Vanguard published in 2021, 96% of plans provided employer contributions in 2020, while roughly two-thirds of plan participants received their full employer-matching contribution.
Making the most out of your workplace retirement plan is easy: All you have to do is set your minimum contributions to meet your employer’s maximum matching contribution. Employer 401(k) match programs usually match a percentage of an employee’s contributions or a percentage of their salary. At Human Interest, 42% of total plans that provide a match offer of $1.00 per dollar on the first 4%.²
Example: If we use a match formula that contributes $1.00 per dollar on the first 4% match following the same scenario above (a consistent $60,000 salary over 20 years with an average 5.5% annual rate of return adjusted for inflation and average expense fees), you could come out ahead with an additional $83,683 in savings for a total of $397,497.³
How 401(k) catch-up contributions can help kickstart savings for older workers
While it’s true you can’t make up for lost time, you can make catch-up contributions starting at age 50. So, what are 401(k) catch-up contributions? They are retirement contributions in excess of the standard IRS limit designed to help individuals age 50 and older save more for retirement.
In 2025, the standard IRS 401(k) contribution limit is $23,500.
Eligible workers ages 50+ can contribute up to an additional $7,500, for a total of $31,000.
Workers ages 60-63 can make a higher catch-up contribution of $11,250, for a total of $34,750.
Perhaps you haven’t been able to save as much as you would have liked for retirement. According to the Bureau of Labor Statistics, workers earn the most when they are between the ages of 35 and 54. When you’re looking to make up for a past shortfall, catch-up contributions are a great way to leverage what’s possibly your highest lifetime earnings for retirement if you’re able to financially flex.
On the other hand, maybe you’re on track at 50 with a different retirement savings tool—such as an IRA—but could use more tax shelter. A 401(k) is going to offer significantly higher contribution limits than an IRA. For 2025, the IRS limit for IRA contributions is $7,000, with an additional $1,000 allowed as catch-up. At a $31,000 limit (or $34,750 for those aged 60-63), versus just $8,000 for an IRA, 401(k) catch-up contributions may provide tax relief by reducing your current taxable income.
Your 401(k) can still make you a millionaire
If you’re early into middle age and have a decade or so or working years ahead of you, you may be one of the savers to join the growing ranks of so-called “401(k) millionaires.”
In mid-2021, the number of 401(k) accounts at Fidelity Investments with balances of at least $1 million grew 84% year over year to 412,000. Over that same period, the overall average 401(k) balance hit $129,300, up 24% from the same time last year.
The higher number of 401(k) millionaires was due in part to a run-up in the market. Remember that 3%–8% average? In 2020, the average rate of return for 401(k)s was 15.1%. Over the previous three years, the average rate of return was 9.7%—and over the last five years, it was 11%. Regardless, you can still become a 401(k) millionaire with a bit of diligence.
Example: Below are a few scenarios that illustrate how you can become a 401(k) millionaire over the age of 40, assuming you start from zero and the market posts an 11% rate of return⁴ (the average 401(k) return between 2015 and 2020):
Age 40: contribute $400 per month, for 30 years, with retirement at age 70
Age 45: contribute $800 per month, for 25 years, with retirement at age 70
Age 50: contribute $1,300 per month, for 20 years, with retirement at age 70
Explore your 401(k) plan options
If you’ve hit at least 40 and you’re facing a retirement shortfall, you’re not alone—but you still have time to save. While IRAs also offer a catch-up contribution, it's only $1,000 (on top of the $7,000 annual limit for a total contribution limit of $8,000). However, with a 401(k) as the centerpiece to your better-late-than-never retirement plan, you have options to help you achieve a more comfortable retirement.
Know that you don't always have to start taking funds out of your 401(k) when you first retire. If you’re still working after you turn 59 ½, you’ll need to follow your 401(k) plan’s rules for withdrawals as well. While you’re still working, the plan’s rules could limit the amount you can withdraw or even bar you from making withdrawals completely. In most situations, you don't have to start withdrawing from your plan funds until age 72, which is when required minimum distributions (RMDs) kick in.
Ultimately, you'll want to consult your tax or financial advisor about tapping into any income streams you may have: your 401(k), Social Security, and more. It’s also important to discuss decisions around the right balance for your investment options. A tax or financial advisor can help you assess your comfort level around being invested in stocks, bonds, and more.
By getting started now, working a bit longer, and making catch-up contributions—who knows? Maybe you could even become a 401(k) millionaire.
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Article By
Eric Phillips, CFAEric Phillips, CFA, has dedicated his career to improving financial wellness. He began his career at Artisan Partners, a global asset management, firm and currently serves as the Senior Director of Financial Partnerships at Human Interest where he works with financial advisors and industry partners to help them offer affordable retirement plans.
