How Much Should People Have Saved In Their 401Ks At Different Ages

Saving Jar Colleen Kong

Art by Colleen Kong at KongSavage.com

The 401k is one of the most woefully light retirement instruments ever invented. The worst is the IRA which limits you to contributing only $5,500 only for individuals making under $60,000 a year and married couples making under $116,000 a year. Meanwhile, you have to make less than $114,000 a year as a single or $181,000 as a married couple for the privilege of contributing after tax dollars to a Roth IRA, which I do not recommend before maxing out your 401k.

Give me a pension that pays 70% of my last year’s salary for the rest of my life over a 401(k) any time! With the government only allowing individuals to contribute $17,500 a year in pre-tax income into their 401ks in 2014, once again, our politicians fail us with their regulations.

The average 401k balance as of January 2014 is around $99,000 thanks to an incredible 30% rise in the S&P 500 in 2013. Let’s add another 13% increase for 2015 given the S&P 500’s performance and we’re at roughly $112,500. Even so, $112,500 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 full 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 $17,500 a year in contribution is much too little, therefore contributing less is illogical. For 2015, the maximum contribution is $18,000.

* 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.

* $17,500 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 $17,500 X the number of years worked after contribution $8,000 the first year. There is no company match or growth.

* The higher end column will assume $17,500 X the number of years worked X a 5%-10% constant rate of return. There is no company match in the high end either.

* 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 401(k) 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

401k Savings By Age

From the results, we can conclude that even after 43 years of consistent saving, you only have around $743,000 to $3,500,000 in your 401k. Let’s say you live for 20 years after retiring at 65, you only get to live on $37,150 – $175,000. If goodness forbid you live to age 95, then you can only live off of $24,766 – $116,600 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.

You should check out my article on “How To Better Manage Your 401K For Retirement Success” where I highlight three different scenarios you should run to see if you’ll make it. Fidelity came out on 2/14/2013 highlighting the average of their 12 million 401(k) plan participants is up 12% to $77,300. For workers 55 years of age or older, the average balance is $143,300. These are terrible numbers.

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. This is why after maxing out your 401k, it’s good to open up an online savings account, which have higher interest rates on average than your traditional bricks and mortar bank due to lower overhead costs. Your goal should be to then build as many passive income streams as possible.

Consider raising your after-tax savings percent after 401k contribution to possibly 50%. It won’t be easy, but if you practice raising your savings rate by 1% a month until it hurts, you’ll find it easier than you think. The most straight forward method is to make your 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!

Recommended Actions For Increasing Your Wealth

* Manage Your Finances In One Place: The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.

One of their best free tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button. Their Investment Checkup tool is also great because it graphically shows whether your investment portfolios are property allocated based on your risk profile. There is no better free online tool that has helped me stay on top of my finances more than Personal Capital. It only takes a minute to sign up.

* Check Your Credit Score: Everybody needs to check their credit score once every six months given the risk of identity theft and the fact that 30% of credit scores have errors. For over a year, I thought I had a 790ish credit score and was fine, until my mortgage refinance bank on day 80 of my refinance told me they could not go through due to a $8 late payment by my tenants from two years ago! My credit score was hit by 110 points to 680 and I could not get the lowest rate! I had to spend an extra 10 days fixing my score. Check your credit score for free at GoFreeCredit.com and protect yourself.

Photo: Occupy SF Tent, by Sam. Might be your home if you don’t max out your 401K and save more!

Post updated on 1/1/2015.  

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Young and Ambitious says

    Hey Sam!

    I’m so glad I stumbled across your website. I’ve been trying to find financial advice online for a while. So I’m 22 and just graduated and am making $77,500 pre-tax with no financial debt.

    I’ve been really struggling with where to allocate my money. I’m saving roughly 40% of my income taxes. I was thinking that it would be better to put more money in my accessible American Funds portfolio and max out my Roth IRA before maxing my 401k.

    Here’s my thinking:
    By maxing my Roth IRA, I’ll be able to pull out the $10k when I decided to by a house. I’ll also be able to pull out of my AF portfolio and add that towards my down payment, therefore reducing my mortgage rates and such. If I were to put it in 401k, it will grow but will be unaccessible for 38 more years. I could instead be putting it into property which would grow faster than my 401k.

    I know you think max out by my second year but I guess I’m just not sure why you’d want to put that much into an inaccessible account?

    I’d really appreciate the guidance!

      • AmericanFool says

        Agreed, 40% is great and American Funds have very high fees. They claim long term outperformance, but I once calculated that even if they outperformed for two decades by 1% per year, it still would be better to invest using low-cost funds like Vanguard. There were special considerations in that analysis, so do your own work, but it gives you an idea how much extra you may be paying. I agree with Financial Samurai – I would go the 30 year mortgage for the flexibility, but pay it off in 15 if I really wanted security, or if my job was not very secure (as is true for many of us these days.) If your job is very secure, then I think it would make sense to take risk elsewhere and invest the difference between the 30 yr payment and 15 yr payment, rather than pay down the mortgage early. Long term, your investments should garner around 8% with a 60/40 split stocks and bonds (and more aggressive at your age is ok), but the long-term return of paying off the mortgage early is your interest rate, let’s say 3%. The difference (8% vs 3%) goes directly to your bottom line (and net worth) if you get average returns over the long run (any given year will tend to vary significantly, but it’s rare to get much less than 3% in any single year in a balanced portfolio, and rarer for extended periods. This bet has a high chance of working out for you). You are sacrificing current cash flow to create future cash flow, so keep a safety net in a savings account, and then keep dropping the balance of the 40% savings into investments. The benefit of this approach is you don’t need to be a stock picking expert or spend your every extra waking moment thinking about it. Automate everything you can. Set it and you only have to revisit every few months for a few minutes… then go live your life!

    • Jay says

      Since you are in the market to buy a home during what is low interest season… think about getting a 15 yr fixed rate morgage over the normal 30 yr. This will save you so much in interest payments and allow you to buid your wealth/positive value on your home, much faster. We refied and went from a 26yr remaining to a 15 yr and will ultimately save over $140K on interest of our home. Yes you pay more, but for the interest savings, it is well worth it in a very short period of time. And, in your case it sounds like you can have net cash flow to pay the higher mortgage amount. This is my new philosophy for my kids when they are of buying age.

      • says

        Interest savings isn’t the only thing to consider. Don’t forget about the opportunity cost of the extra money going towards the 15-year mortgage. The payment difference between a 15-year and 30-year mortgage could be invested at a possibly higher rate of return and in the long run could build more wealth.

        Just thinking about interest savings isn’t looking at the big picture.

  2. Wallstreet26 says

    If you don’t know what you are doing. Juss put it in a standard index with low cost. Which is basically vanguard or fidelity. If I was uninformed and in your position, I’d juss put in a target date fund. I haven’t looked intently at robo advisors, but they look similarly cheap too with decent allocation for aggressive portfolios. And my advice to you is to screw bonds, don’t touch them until the 10 year treasuries touch 7 percent or you are in your 60s.
    You are prolly in the 28 percent tax bracket. So you should max out the 401k and trad Ira if tax deductible. Why is it a good idea? Because that is money you would have juss paid in taxes. Go aggressive too because market downturns are typically about what you would pay in taxes anyway.
    It’s not all inaccecissble either, you can borrow max of 50k in a balance of 100k in your 401k. Also you can access without penalty if you buying a first home, if you have future school expenses or medical need. Lastly real estate does not grow faster than the stock market. Maybe in the past 30 years but rates have been dropping which fueled housing prices and the beauty of housing is you borrow 4 times what you put down.
    Lastly Roth IRA is a good idea only if trad Ira is not tax deductible. Anyways good luck young cubby.

  3. nlf says

    Just graduated and started working (in finance). I’m 21 going on 22. Currently, I’m contributing 6% of my paycheck to the 401k–just enough to the get the max. employer match. 6% is a ways off from the max contribution, though. Should I be contributing more? I already have about 12k in savings and 10k in a brokerage account. I don’t have many expenses (still live at home with my parents) besides gas and other sundries (i.e. food, entertainment)–usually around 500-600 per month.

  4. Thomas47 says

    Nlf,
    what a great start. Congratulations.
    If you have any debt, pay it off. Otherwise, yes – continue saving.
    When I was your age, I maxed out pretax savings and have been doing so ever since.

  5. Hao says

    Great article and wonderful discussion. Not sure if anyone asked – there’s a lot of comments to ready thru :)

    But we were wanting to retire early (before 60) and were wondering if it’s better to just max out our 401K contribution and pay the 10% early withdrawl feee (or whatever the fee is when we do return)

    vs

    putting less in the 401K and using that money to build a larger “non-retirement” account that won’t have the penalty but doesn’t have the tax deferment?

    I know tax bracket would factor into the equation – but our tax bracket doesn’t seem all that high when we use turbo tax and it says you’re paying X%

    • Wookie says

      A lot of folks don’t realize that there’s no “additional penalty” to withdrawals from a 401k at age 55 if you are ‘retired’ from that company. That’s a key difference between a 401k and an IRA.

      • Hao says

        Guess I should be more precise. I can’t tell exactly when but we were targeting more in the mid to late 40’s, so i’m guessing that’s early enough that there would still be a penalty.

        We have a large chunk in 401k’s etc but not much outside of retirement type accts that have early withdrawal penalties.

        So the question is whether it makes any sense to put a little less in the 401k and more in a regular Mutual Fund/Index type account so we have $ avail for when we retire early. Or because of the tax deferment (and faster growth) is it better to just pay the 10% penalty

        • Wookie says

          I don’t know which is smarter, but the wife and I ended up with different strategies. She never worked anywhere that allowed post-tax contributions to a 401k, so her excess funds went to brokerage.

          Since my 401k allows post tax contributions, I’ve been maxing that out (max the pre-tax, max the ‘over 50’+up, max the post-tax).

          I like that a lot of our wealth is in retirement accounts, it puts them out of reach of most ‘judgements’.

          We’ve used some of her brokerage funds on ‘lifestyle’ things, so the flexibility is nice.

  6. ThatGuy says

    So I am 30 years old just got out of the military and have nothing saved up due to some bad choices when I was younger. I racked up debt and am now paying the price. I now have a solid paying job that offers a 401k that matches 1/2 of my contributions the first year and then full contributions after 2 years. I would say I have about close to a 6 figure debt between a house, credit cards and just other things. I feel like I can make a 5-8% contribution for a while but is this worth doing or should I pay off my debt first?

  7. Andy says

    Hey Sam,

    I have been reading on your site for a few weeks now and I have learned so much. I am 20 years old make 35-40k a year right now. I opened a Roth because I make less than 60k. I will be eligible to contribute to a 401k soon but do you think it will be wise for me to contribute to both based on my income?

    • Wookie says

      If your 401K has any ‘company match’, capturing that is a big priority. My company matches 75% of the first 8% of contribution, so contributing at least 8% is a ‘no brainer’. It’s free money.

  8. Shan says

    Two things financial consultants don’t mention when talking about 401K and retirement:
    1. 401K won’t be the only income for retirement. People who worked 30-40 years will have a social security. Some people may have investment properties that generate rental income as well.
    2. After people retire, they spend less than when they were working.

    As result, let’s use today’s cost to estimate, say a couple of 65+ age who made $250K combined annual income before retirement, each day they spend $100 on food (very good meals) + $20 car insurance and gas, + $20 property tax + $10 utilities + $50 misc = $200 per day or $6000 a month. This is high estimate. That’s $72K a year. Plus annual car expense (leased a good car with tax insurance for $750/month or $8K a year), travel $20K a year (which is good for two people, 4 trips a year each cost $5K), plus another $10K a year for other expenses. That’s total $110K after tax a year for a couple or $150K pretax.

    Source of income:
    1. Each of two has $1.0M-$1.5M 401K balance at 65 which is normal for $250K combined income couple, taking $100K out a year shouldn’t reduce much of the total portfolio if it has 5% annual gain.
    2. Social security will bring in ~$60k combined annually.
    3. Rental income. Some $250K+ couples have investment properties. But most of them can sell the primary house at huge gain and move into nice apartment at 1/3 of their original house’s cost. The extra 2/3 profit can range from a few hundred Ks to $1M in large cities like NYC, LA, SF, San Diego, etc.

    So over all, it’s not as scary as it says. You don’t need to make 100% of your job income to sustain your life style when retire.

    • says

      Those are good points. Let’s hope social security is around, inflation is tame, and people have built rental property assets.

      You definitely don’t need 100% of your job income to sustain,especially since when you are retired, you are NO LONGER saving for retirement.

      But I’ll tell you this as someone who experienced two full years of early retirement with no income from 2012-2013: It’s better to have more and be safe than have less and sorry.

  9. Nick says

    Hey Sam!

    I’ve been reading many of your posts on here since I started taking saving for retirement seriously and they are very informative and helpful. Here’s my situation:

    I just turned 23 and I make $40,000 a year and been working the same job since I turned 18. From 18 to 20 years old I only contributed 1% to my 401k and employer matched some of it. Around 21 years old I started to contribute 6%. My employer also matched 70% on the first 6% I contribute or so I was told.

    Anyway… about 6 months ago I started taking saving for retirement seriously and began contributing 10% to my 401k. Little did I know that my employer then contributed a full 9% match to my 401k. THAT’S RIGHT A FULL 9%!!

    At the same time I began contributing to a Roth IRA and maxed it out $5500 for 2014. Currently contributing $200 per month to my Roth.

    So my employers 401k match and my contributions total 19% plus contributing $200 per month in Roth. I don’t have a TON saved at the moment but I have apprx $12,500 in 401k and $5,600ish in Roth. But 401k is going to grow rapidly as long as employer keeps contributing 9%!

    Additionally I want to add that since I didn’t move out of home until I was 20, and I was never a big spender, I have been able to save $30,000 liquid. Now I’m trying to decide whether it is a better decision to use it for a down payment on a $100,000 or less house (since I live in Nebraska houses are cheaper) or put some of it towards retirement and rent a house or apartment. I have done my fair share of research over the last couple months on home ownership and all expenses and everything as well. Either way is better than it just letting $30k sit in a checking/saving account earning 0.001% interest haha.

    Am I doing okay for retirement? Should I be looking to buy a house in the near future or is the money better put somewhere else?

    Again thanks for all the articles you post on here and keep them coming!

  10. Tony says

    Thanks for providing us with this great information. I am 36yrs old and have been contributing to my 401k for approx 8yrs. I make ok money (275k annual) and am providing for my 3 kids and wife. My 401k balance is currently 195k plus I own two properties that are mortgaged for the next 25 yrs. No cc or school debt.

    I am trying to estimate when and where I can retire. Specifically, I would love to see a view on options for retirement at the 500k, 1m range. Every calculator I use says that I should be saving more money, even though I am maxing my 401k and spending like scrooge. I am struggling to understand how I can measure the true amount of income I will need at retirement since I do not know where I will retire. How do you take into consideration retirement lifestyle when calculating retirement income needs? e.g., If I choose to retire in Thailand, can I retire at 45yrs old instead of 65? Just trying to make sense of the “when” and “how much” question.

    • Thomas47 says

      Great income, Tony.

      A few questions to consider:
      – Do you intend to pay for college for the kids?
      – How much equity do you have in the properties, and are they expected to have better returns than the market over the next 25 years?
      – If you had no debt, how much income would you need for basics, insurance, travel, entertainment, and property taxes?

      • Tony says

        - College: My kids are 11yrs, 8yrs and 4 yrs old. I plan to assist all three with college; either 100% or partial. I do not currently have a 529 plan. My thinking is that I will redirect all savings to college during those years.

        – My primary residence has equity (100k) and will climb since it is in a good market (North NJ). My secondary property has zero equity and is currently being rented to pay the mortgage; I am not cash-f blow positive on that home, but I am holding to sell until there is some equity. I do not expect the next 25 yrs to beat the market,

        – With zero debt and grown children, I expect my wife and I would need $5k/month.

      • Tony says

        - I plan to pay for college, but I do not have a 529 plan or anything specific set aside. I am relying on my annual income to cover the additional expense. My children are 11yrs, 9yrs and 4yrs old, so college fees will be big for me.

        – My primary residence has equity (100k) and will be profitable when I sell it. My secondary property has 30k equity and is being rented out for the next 3 yrs. The rent pays the mortgage, tax and insurance, but I am not cashflow positive on that house.

        – With the children grown and zero debt, I would estimate that my wife and I can live on 5k monthly

        • Thomas47 says

          Tony,
          some thoughts and ideas-

          – Property: if property 2 is not on track for appreciation and cash generation, consider selling it and investing that $30k somewhere with positive returns. Even applying the $30K to your mortgage on property 1 would be better than breaking even.

          – College: In a few years, the kids can help by doing part-time work, getting scholarships, or going to community college for two years and transferring.

          – Income: Apply future income increases and bonuses to savings and debt reduction. As the kids get older, your spouse could also consider work outside the home for an accelerated path to retirement.

          Bottom line: Save more and reduce debt. The good news is you are young, and your income is strong with years of upside potential.

      • Tony says

        thanks for the formula. What does the 3% represent?

        “With a 275K annual income, I hope you have more savings BEYOND the 195K in your 401k.” – I wish I can say that I have a secret stash of cash, but I do not. All my savings have been in 401k or pumped into the two properties that I own. Short of canceling cable tv and getting rid of some low cost bills, I cannot figure out how to save more money when supporting my family.

        I forgot to mention that I live in North NJ so my cost of living is extraordinarily high.

        Should I be focusing on increasing income or do you really think I should be saving more?

        • Wookie says

          3% represents a very conservative (IMO) withdrawal rate that will allow your money to never run out. The “consensus opinion” had been 4% for some time.

          Stated very simply (using 4%), if you have a $1M portfolio, you can withdraw $40K a year and never run out of money. This assumes you have moderate risk in your investments, something like 50% in equities and 50% in bonds. (Lots of disagreements on ‘where’ that split should be drawn, but the important bit is you can’t stash it all in ‘safe’ CD’s – it has to have growth potential.)

          The pull back to 3% is driven by increased uncertainty in the markets in the last 20 years. On the other hand, I’m a ‘glass half full’ sorta guy. The last 20 years has been wonderful for the ‘do it yourself’ index investor. I can create a well-diversified portfolio of 12 index funds at Schwab with a weighted expense ratio of under 0.25%. Could be done at Vanguard and others easily, I just ended up at Schwab. I figure if you’re not paying Edward Jones 1.75% to ‘manage’ your money (my returns easily match theirs) then the withdrawal rate can be higher. I don’t think 5% is ridiculous if you have low costs.

  11. Teresa F says

    Sam, What advice to do have for the following scenario:

    You’re identified by your employer as a HCE, (highly compensated employee). Your base is 55k, and your bonus is near the 150k per year. Since the new company rules were instituted, in 2014, you are allowed to contribute up to 15% of your Base, and up to 100% of your bonus, (not in a retirement plan, but) in a deferred savings plan. This deferral plan allows you to tap this income four years following your separation from the company.
    My questions:
    How can one actually work to fund a qualified retirement plan with this set of rules?
    What other vehicles are available to work with in order to fund a retirement account?
    Is this actually legal?
    Thanks in advance for any help.
    T

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