Think You’re Saving Enough for Retirement? Think Again

Mature couple meeting with their financial advisor

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Starting a new job and checking the maximum contribution for the tax-deferred, employer-sponsored 401(k) retirement savings plan may be the right thing to do, but is it always enough? Many people might be surprised to learn it isn’t.

Vanguard’s “How America Saves 2021” report, released last month, warned that “higher-wage participants may not be able to achieve sufficient saving rates within their 401(k) plan because of statutory contribution limits.”

Key Takeaways

  • For many Americans, maxing out contributions to an employer’s 401(k) plan may not be enough to reach their retirement savings goals, financial advisors warn.
  • Higher-wage savers should consider supplementing their 401(k) with other investments to achieve their goals.
  • Additional investments to consider include IRAs, health savings accounts, and taxable accounts.

By law, maximum annual contribution limits into a 401(k) are $19,500 for those under age 50, plus an additional $6,500 “catch-up” contribution for those 50 or older. Typically, financial advisors recommend saving at least 12% to 15% of your annual income for retirement. Based on those limits, however, you can be earning $163,000 each year and maxing out your contribution, and still miss that goal. Someone earning $150,000 per year would barely be making the goal, at around 13%.

That means many Americans who are only stashing retirement money away like this probably won’t be retiring the way they expected, and should be considering options to supplement those savings. Some choices to consider include traditional and Roth IRAs, health savings accounts (HSAs), taxable accounts, and other employee benefits.


There are two main types of Individual Retirement Accounts (IRAs): traditional and Roth. Total annual contributions to all your IRAs combined are capped at $6,000, plus a $1,000 catch-up if you are at least 50 years old, and both traditional and Roth IRAs can be used in tandem with 401(k) plans. 

Traditional IRAs allow you to contribute pre-tax money. Earnings can potentially grow tax-deferred until you withdraw them in retirement, when many retirees find themselves in a lower tax bracket than they were before retiring.

Roth IRA contributions, on the other hand, are made with after-tax money, which allows your money to grow tax free and untaxed at withdrawal, so long as you wait to make withdrawals until you’re at least 59 ½ years old. “The Roth IRA is fantastic because you pay taxes now and pull out money tax-free when you retire,” said Mitchell Rock, financial advisor at Ameriprise Financial.

Health Savings Accounts

If you have a high deductible health plan, or one with a minimum deductible of $1,400 for an individual and $2,800 for a family, you can sock away pre-tax money for qualified medical expenses. Items you can use the tax-free money to pay for include health insurance deductibles, copayments, and coinsurance, but usually not premiums.

For 2021, you can contribute up to $3,600 for individual coverage and double that for a family. Next year, the totals will increase to $3,650 for self-only coverage and up to $7,300 for a family. Whatever isn’t used can be rolled over to the following year. 

And the best part? The HSA money can earn interest or, in some cases, be invested in instruments like mutual funds, bonds, and stocks, and grow tax free. In essence, the money going in is pre-tax, grows tax free, and is withdrawn tax free to pay medical expenses. 

“Contributions aren’t high but every dollar counts, and the tax benefits on these are phenomenal,” said Lauren Wybar, a senior wealth advisor at Vanguard.

Taxable Accounts

Though not as ideal because they are not tax advantaged, people can still grow money in taxable accounts. These include checking accounts, savings accounts, money market accounts, and brokerage accounts.

“There are no limits—no contribution or compensation limits,” Wybar said. “Just make sure they are tax efficient because taxable accounts are exposed to taxes.”

Wybar recommends investing in growth stocks to accomplish this. “The more growth-oriented stocks that are in here, the better, because the capital gains tax is lower than the ordinary income tax,” she said. 

Other tips include knowing that investments that generate income each year are not usually tax efficient—that’s because tax is paid on the distributions—and that index funds tend to be more tax efficient than actively managed funds. Actively managed funds are prone to racking up a tax bill each time the manager liquidates and purchases investments in an effort to beat the market.

Another route, if you have time on your hands and want to be more precise in timing your portfolio to be more tax efficient, is to invest in individual stocks instead of exchange traded funds (ETFs), mutual funds, or index funds. That way, you can employ tax strategies like harvesting losses, which can help lower your tax bills. “Wall Street packages things, but in investing’s purest form, it is stock,” Rock said. “Get over the psychology of the market’s up or down. Instead, buy what you know and companies that make what people use.”

And don’t forget the so-called Dividend Kings, or companies that have increased their dividends at least 50 years in a row, and the “Dividend Aristocrats”—S&P 500 companies that have increased their dividends for at least 25 consecutive years, Rock said. Those companies may have lower growth, but their consistency in paying and increasing dividend payouts can benefit retirees.

Other Employer Benefits

Some employers might offer other benefits besides the 401(k) plan. It may be worth investigating whether your company offers a stock option or stock purchasing plan that gives workers the opportunity to acquire company shares, or a deferred compensation plan allowing employees to defer a portion of their pay. Deferred compensation means you are also delaying  paying taxes on the money until the deferral is paid.

Self-Employed Strategies

But what about small business owners like doctors, dentists, and cafe owners who may have pumped every dime they made into building their business and tended to their employees’ welfare over the years, but didn’t think much about their own retirement? “The other strategy might be selling some of the business,” Mitchell said. “Even if you’re 50, if you have a successful business, you can sell it and that event will be the retirement plan.”

In the end, Rock said, it is “not the vehicle or package you invest in. Just invest. Invest in yourself every day and allocate money to an account you promise yourself you will never touch. Don’t be afraid if someone says the market is too high. There will always be people who say this. What the market values a company at does not mean that is what the company is worth.” 

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Vanguard. “How America Saves 2021.”

  2. Finra. “2021 Annual Contribution Limits.”

  3. IRS. “Traditional and Roth IRAs.”

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