How much do you need to save in your 401(k) for retirement? Since predicting the future -- and your future expenses -- is almost impossible, that's a question only you can answer.

But you can easily determine how much you'll need to save every month, starting now, in order to someday have $1 million in your retirement account.

If you aren't familiar, a 401(k) is an employer-sponsored retirement plan (which means if you own a small business, you are the employer) that allows you to invest pretax dollars. The employer may or may not match a portion of those contributions.

Which means your retirement savings grow tax-free: You aren't taxed on your contributions, or any earnings, until you start making withdrawals when you reach retirement age.

And since you invest pretax dollars in a 401(k), that means you owe less in income taxes each year you contribute. For example, make $50,000 and put $4,000 in a 401(k) and your gross income drops to $46,000. 

A couple of other notes: For 2019, the maximum you can contribute to a 401(k) is $19,000. If you're 50 and older, you can make a "catch up" contribution of up to $6,000, for a total of $25,000. 

And your employer can match some or all of your contributions, or contribute to your plan via profit sharing, for a total maximum allocation of $56,000. In simple terms, you and your employer can put no more than $56,000 in your 401(k) in any given year. (More on that in a moment.)

So how much do you need to put in your 401(k) each year in order to have $1 million when you're 65? That depends, of course, on two factors: how old you are, and your average rate of return.

Here's a breakdown by age and rate of return, assuming you're starting from $0. Notice that, because of the time value of money, even small differences in average rate of return make a huge difference in the amount you'll need to invest per month. (More on that in a moment too.)

Age 25

  • 2 percent return: $1,361
  • 4 percent return: $846
  • 6 percent return: $502
  • 8 percent return: $286

Age 30

  • 2 percent return: $1,646
  • 4 percent return: $1,094
  • 6 percent return: $702
  • 8 percent return: $436

Age 35

  • 2 percent return: $2,030
  • 4 percent return: $1,441
  • 6 percent return: $996
  • 8 percent return: $671

Age 40

  • 2 percent return: $2,572
  • 4 percent return: $1,945
  • 6 percent return: $1,443
  • 8 percent return: $1,052

Age 45

  • 2 percent return: $3,392
  • 4 percent return: $2,726
  • 6 percent return: $2,164
  • 8 percent return: $1,698

Age 50

  • 2 percent return: $4,769
  • 4 percent return: $4,064
  • 6 percent return: $3,439
  • 8 percent return: $2,890

Clearly the later you start, the tougher it is to save $1 million, even in a tax-deferred retirement account where contributions and earnings grow tax-free.

If you're 50 years old and you're starting from scratch today, even if you average a healthy 6 percent return you'll still need to contribute $41,268 per year. Since you can't contribute but $25,000, that means your employer would need to kick in $16,268 in matching funds or profit sharing contributions.

Which leads us to an important point.

Small-Business Owners Have a Potentially Major 401(k) Advantage

If you own a small business and set up a 401(k) plan for your employees, roughly speaking you must offer the same plan benefits to your employees as you receive. So you may not want to establish a huge match plan.

But if you are your only employee, then you can feel free to match to your heart's content.

That's what many entrepreneurs do.

For example, you could set up your plan to match 100 percent of employee (meaning your) contributions. If you're under 50, that means you can contribute $19,000 in pretax dollars, and your company can contribute $19,000 as well (in pre-corporate tax dollars.) That's a total of $38,000 per year.

And then, if possible, your company can also make a profit-sharing contribution of $18,000, bringing your total 401(k) allocations to the maximum allowable $56,000. (Just keep in mind that employee and employer contributions can't be greater than the individual's income.)

Or, if you're over 50, you can contribute $25,000, your company can match that $25,000, and your company can make a $6,000 profit-sharing contribution. 

Either way, that's $56,000 per year going into your 401(k).

Do that for five years and you have $260,000 in your account -- even if that money generates no return.

Which brings us to another important point.

How Much You Save Matters a Lot More Than Your Rate of Return

As the charts above showed, if your goal is to have $1 million in your 401(k), the greater your rate of return, the faster your savings will grow.

That's why most people estimate their savings using a potential rate of return; after all, if you're 30 and you average an 8 percent return you "only" need to save $436 a month. If you average a 4 percent return, you need to save $1,094 per month.

That's a huge difference.

But that difference in investment returns is also something you have little control over.

But what you can control is how much you save.

Say you make $40,000 a year and save 3 percent of your salary. That means you save $1,200 the first year. If you earn a 4 percent return on that money, after one year you have $1,248. If you manage an 8 percent return, you have $1,296. That's not only a better return, it's two times better.

But if you increase your rate of savings by 1 percent, to 4 percent, you have $1,600 -- even if you don't generate any return at all.

And that's why, if you want to build wealth, the most important thing you can do is to focus nearly all your attention on your rate of savings, not your rate of return.

The more you save, especially early on, the more you'll have later.

To Reach $1 Million Sooner Rather Than Later ...

Spend a little of your time learning about investing. (Or do what Warren Buffett suggests, and invest your 401(k) savings in an index fund.) 

And then spend most of your time finding ways to save more money.

The faster you build your savings -- the faster you achieve a critical mass of wealth -- the greater the effect even marginal gains in investment return will have on your principal. For at least the first 10 years, how much you put in your 401(k) per year makes a much greater difference than how much you earn each year on those savings.

Of course, saving more means finding ways to spend less money.

Saving more might also mean finding ways to make more money.

Plenty of people start side hustles for the sole purpose of increasing the amount they can put away for retirement. 

Which may mean starting your own business. 

After all, that's the best way to take advantage of employer matches and profit-sharing contributions.

When you own your own business, you get to decide how much you'll match. 

Published on: Jun 24, 2019
Like this column? Sign up to subscribe to email alerts and you'll never miss a post.
The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.