How Much Should People Have Saved In Their 401Ks At Different Ages
The 401K is one of the most woefully light retirement instruments ever invented. The worst is the pathetic IRA which limits you to only $5,000 if you make under $58,000 a year for a traditional IRA to completely participate. Meanwhile, you have to make less than $110,000 a year for the privilege of contributing after tax dollars in a a Roth IRA.
Give me a pension that pays 80% of my last year’s salary for the rest of my life over a 401K any time! With the government only allowing individuals to contribute $17,000 a year in pre-tax income into their 401Ks in 2012, once again, our politicians fail us with their regulations.
You know from a previous post that the average 401K balance is around $70,000-$80,000, which is incredibly low given the median age of an American is 36.5.
As an educated reader who is logical and believes saving for retirement is a must, I’ve proposed a table that shows how much each person should have saved in their 401Ks at age 25, 30, 35, 40, 45, 50, 55, 60, and 65. We stop at 65 because you are allowed to start withdrawing penalty free from your 401K at age 59 1/2. Meanwhile, I pray to goodness you don’t have to work much past 65 because you’ve had 40 years to save and investment already!
HOW MUCH YOU SHOULD HAVE IN YOUR 401K AT DIFFERENT AGES
The assumptions for the below chart are as follows:
* For the first fully year out of school, you only contribute $8,000 to your 401K.
* After the first year, one maximizes their contribution every year to their 401K plan without failure. We already agree that $17,000 a year in contribution is much too little, therefore contributing less is illogical.
* Average starting working age is 22. But you can follow the number of years working as a different guideline if you graduate later or earlier.
* $17,000 is used as the conservative base case maximum contribution amount for one’s entire working life. Hopefully the government will increase the max contribution amount over time.
* No after tax income contribution, although more power to you if you have the disposable income to do so.
* The low end column assumes $17,000 X the number of years worked.
* The higher end column will assume $17,000 X the number of years worked X a 5% constant rate of return which is aggressive in this environment.
* Excludes any company match or profit sharing completely. The idea is that by excluding company match and profit sharing, that will more or less make up for the years in which one loses money in the stock or bond market. Furthermore, each company’s 401k match program is different.
* The Lower and Higher Amounts encapsulate at least 60% of all 401K levels for those who contribute the maximum amounts. There will be those with less, and those which much, MUCH greater balances thanks to higher returns.
* You are logical and not a knucklehead. Just by searching this topic, you are taking ownership of your retirement and are thinking ahead with an action plan.
FINANCIAL SAMURAI 401K RETIREMENT SAVINGS GUIDELINE
| Age | Years Worked | Low End | High End |
| 22 | 0 | $0 | $0 |
| 23 | 1 | $8,000 | $17,000 |
| 24 | 2 | $25,000 | $37,000 |
| 25 | 3 | $42,000 | $70,000 |
| 30 | 8 | $127,000 | $182,000 |
| 35 | 13 | $215,000 | $331,000 |
| 40 | 18 | $300,000 | $521,000 |
| 45 | 23 | $383,000 | $764,000 |
| 50 | 28 | $468,000 | $1,075,000 |
| 55 | 33 | $553,000 | $1,470,000 |
| 60 | 38 | $638,000 | $1,974,000 |
| 65 | 43 | $723,000 | $2,618,000 |
From the results, we can conclude that even after 43 years of consistent saving, you only have around $723,000 to $2,618000 in your 401K. Let’s say you live for 20 years after retirement, you only get to live on $36,000 – $131,000. If goodness forbid you live to age 95, then you can only live off of $24,000 – $87,000 a year!
We know from simple economics that thanks to inflation, a dollar today will not go as far as a dollar 40 years from now. Private school tuition will probably cost over $100,000 a year in 20 years, so who knows what medical, food, shelter and energy costs will cost then. One thing is for sure, prices will be much higher.
To play around with various compound growth and contribution assumptions, you can use this compound interest calculator.
TRUST NOBODY BUT YOURSELF
Contribute the maximum pre-tax income you can to your 401K for as long as you work. This is the absolute MINIMUM you can do to help ensure a comfortable retirement. After you have contributed a maximum to your 401K every year, contribute at least 20% of your after tax income after 401K contribution to your savings or retirement portfolio accounts. That way, you will have potentially DOUBLE the amount in total retirement saving if your household income is $100,000 or more. If your household income is closer to $50,000, you should still see a nice 30% boost to your retirement savings if you consistently save 20% of your after tax income.
Treat your 401K just like Social Security and write it off completely from your mind. Do not expect either accounts to be there for you when you retire, just like how you should never expect the government to ever help you when you’re in need. Just imagine 30 years from now, the government deciding to raise penalty free 401K withdrawal to age 80 from 59.5? Unfortunately, you need the money at age 60, and because you withdraw, the government imposes a 30% penalty on top of the taxes you have to pay. Don’t think it can’t happen. Expect it to happen!
The only thing you can count on is after tax money you’ve invested or saved. Consider raising your real savings percent after 401K contribution to 50% as soon as comfortably possible. The easiest thing to do is make 401K maximum contribution automatic, and save every other paycheck for the rest of your working life. Once you maximize your 401K and save over 50% of your after-tax income for at least 10 years in a row, you will be financially free to do whatever you want!
Readers, care to share your thoughts on your age and how much you have in your 401K? If not, do you agree with the estimates above based on age or years of experience? What are some of the things you notice from the chart?
If you want to blast holes at the Ideal 401K Chart, ask yourself why you are blasting holes. Could it be that you are actually just making excuses for your own lack of saving discipline?
How much of your after-tax, after 401K/IRA contribution are you saving?
Note: For those who think this type of savings is hard, Grace Goldoni saved $300,000 by 18. And for those of you who think I believe in just hoarding cash, I don’t. There’s no point making money if you don’t spend your money!
Follow Up: For those asking “How Do I Save So Much For Retirement, If I Don’t Make Much?“, I’ve written a 1,500+ word post on how to get there, with a chart guideline as well.
Photo: Occupy SF Tent, by Sam. Might be your home if you don’t max out your 401K and save more.
Regards,
Sam
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I am 51, so per your chart, I should have saved between $468,000 and $1,075,000. My husband is 53 and in the same range. I have about $500,000 in my IRA/401K/403b/457B etc. accounts and my husband has about $720,000 in his. My husband gets to put about $40,000 in per year, via a SEP via his partnership/business. So I am thinking that we are OK per your chart even though we have major student loans to pay off for our five kids.
We max our retirement contributions every year – even now, when we are borrowing to finish putting our five kids through college; this spring, 3 will have graduated (with jobs). The other two are still in college. This is our 3rd year with 3 in college. We are just barely going to make it through the college costs and likely will not retire until we “retire” all of that debt plus our mortgage. We don’t have any other savings left, other than retirement.
We are hoping to have $3-5M by retirement, and we are hoping to retire as close to 60 years old as possible.
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Financial Samurai Reply:
April 30th, 2012 at 2:31 pm
$1.2 million sounds not bad at age 51/53 combined. You’ve got 7-9 more years to triple that. Seems feasible if the markets hold up.
When you say you don’t have any other savings left, does that mean you have no liquid after tax savings in the bank?
Also, why not let your 5 kids pay for their own way through school, or split some of the cost?
BTW, how did you stumble across this post?
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Not everyone is so lucky to save the max, mr. samurai. In 2007-08, I lost half of my 401k in the crash, at age 27. There is no way I will make that 35 guideline, even the low end. I think your lower age numbers are pretty high for most people. I’m sure there’s a bunch of us in this position.
In the end, the only numbers that matter is the retirement number and what you do with it after retirement. In retirement, I’ll be able to choose where I live and the associated cost of living, which will be much, much lower than this very high cost metro area.
I currently live much more frugally than my friends, family and neighbors. Oh, and in case you are wondering, I max it @17k and have been maxing for the last few years.
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Financial Samurai Reply:
May 3rd, 2012 at 3:47 pm
Tom, I feel your pain about the 2008 crash. I lost about 20-25% in my 401K during that 12 month period. I had about 60% in equities, the rest in a stable value fund.
The low end of my chart EXCLUDES all employer match. My employer has matched $13-$24,000 every year for the past 10 years. Give that some growth, and that’s real money. I’m sure many employers match at least $3,000 a year.
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tom Reply:
May 4th, 2012 at 7:11 am
I also made a foolish move and reallocated in ’08, almost near the bottom. I’ll never make that mistake again.
Yes, my employer does match 3k. It’s a decent company but sounds like I could use a better one. Still, I fell good about maxing and I’m on the right track. At 32, I only have 62k, but it’s double what I had 18 months ago.
It’s great to know I have plenty time to catch up. I also did not get caught up in the Real Estate bust, thankfully. Many of my friends and neighbors in their mid 30′s were not so lucky. One neighbord paid 280k for a condo 5-6 years ago. I’ve been there 10 months and now owe 165k!
It’s a great article. I just don’t think many people max in their 20′s, even college grads. Hopefully they will see this and make better choices with thier 401k and in general.
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By far the most realistic and raw fact guideline for retirement I’ve come across. I have $200,000.00 in total retirement savings at age 32. This number includes 401k, Roth IRA, and standard mutual fund. I’ve always tried to contribute as much as possible to 401k and have been fortunate to max the last 2 years. I’ve found it helpful to increase my contribution after receiving a raise or bonus. I also put $2,500 per year in 529 savings plan for my two young children. Just refinanced my primary residence to a 15 year fixed at 2.875%. My intermediate term goal was to have my house paid off by 40 years old, but with this rate I feel investment opportunity provides a better growth scenario.
Personally, I feel having liquid cash (at least 9-12 months) is the most important goal – assuming no debt.
My long-term goal is to retire at 65 with approximately 4-5 million.
Thanks, and good luck!
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Financial Samurai Reply:
May 12th, 2012 at 8:06 am
Joe, glad you enoyed the post, and well done with your own refinance and savings goals! I had a whopper of a time trying to refinance my recent primary mortgage. It took 97 days!
http://www.financialsamurai.com/2012/04/30/how-long-does-it-take-to-refinance-a-mortgage-loan/
How did you find this post btw? thx
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This is really ridiculous. To comment on your 300,000 by the time someone was 18 is absolutely ludicrous. 17,000 per year is insanity unless you are well into six figures. I had to re-read this thing a couple times to make sure I wasn’t jumping to conclusions. This site should have a disclaimer that it is only relevant to doctors, lawyers etc.
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Financial Samurai Reply:
May 18th, 2012 at 7:49 pm
The $300,000 by 18 is to show extreme cases of savings to motivate you to save that much by the time you’re in your 30′s.
Read this post and stop making excuses http://www.financialsamurai.com/2012/01/12/24402/
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