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 $18,000 a year in pre-tax income into their 401ks in 2015, once again, our politicians fail us with their regulations.

The average 401k balance as of January 2015 is around $113,000 thanks to an incredible 30% rise in the S&P 500 in 2013, followed by another 13% increase in the S&P 500 in 2014.

Even so, $11300 is an incredibly low amount 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 $18,000 a year in contribution is much too little (the max you can contribute for 2015), 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.

* $18,000 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 $18,000 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 $18,000 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

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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 4/22/2015.  

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. Sam focuses on helping readers build more income in real estate, investing, entrepreneurship, and alternative investments in order to achieve financial independence sooner, rather than later.

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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.

        • $iddhartha says

          I maxed out my mortgage term in order to pay off student loans. Professional loans for me (with automatic debit discount) were at 6.55%. And 6.55% is no joke at the tuition rates most professional schools charge. I think my interest portion alone my first year out was around 11 grand.

      • 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.

    • $iddhartha says

      I know many people tend to think of “free money” as only relating to their employer match. However, consider that you are still saving plenty of money in taxes by maxing out your 401k and IRA (assuming that you can afford to do so).

    • $iddhartha says

      Awesome, keep in mind, when you max out your 401k and IRA you are still saving plenty of money in taxes. I think there is a tendency for people to think of “free money” in terms of only the portion that the employer matches. Don’t forget tax savings people!

  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.

    • $iddhartha says

      There’s no “right” way to do it. But there are ways to receive money from your retirement accounts before 59.5 without penalty. Specifically, IRAs and Roth IRAs. taking “equally substantial” payments, etc. You can also rollover your 401k to an IRA when you retire.

  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

  12. idonotdonot says

    I’m assuming this isn’t counting Social Security. I like the information, but realistically SS will be around in one form or another to supplement retirement income.

    • says

      No, I don’t include Social Security to be conservative. At the current rate, Social Security will pay out about 70% of what they say they will pay out. I encourage people to write off Social Security to zero so they can get more motivated to save and invest for their future.

  13. David says

    Your savings guidelines are BS. It doesn’t take into account if you have a government pension and the amounts shown are unrealistic. I am a Gen X’er and started saving in the late 90s. I was in 2 CRASHES. (!) The one after Tech boom/9/11 and then the one in 2008.

    • Wookie says

      Crashes don’t matter much with your timeline. Of more importance is how you responded. If your portfolio went down 30% and you got out and didn’t get back in until the market recovered, then you screwed yourself. I lived through those same crashes ( young boomer here) and did just fine.

      • Victory says

        I am a Gen Xer who started saving into my 401(k) in the mid 90s, started working out of school in mid-92 in the Silicon Valley making about $11/hr. I wish I had been frugal enough to start contributing more earlier. I saw my first account go from $49K at the height of the tech bubble, go down to almost $15K by 2001 because I was a deer in the headlights. I left that account and went to another company. I let the first account sit, and when we got through the 2008 crash, and it had gone back up to ~$48K (keeping in mind that I had not contributed to it since Dec of 1999), I rolled it over into my new company’s 401(k). I probably lost a few tens of thousands by waiting an extra year. My combined account is now around $440K, about in the mid-range of the chart for my age. I only actually maxed it out two years ago, though I was riding the high end of maxing it out for a few years. I went through a separation last year and had legal issues (child custody and support), so I dropped it way down last year to minimize my CS. I think this year, with the legal things settled for now, I can max it out again, even paying child support. I also managed to buy a house at pretty much the bottom of the bubble in 2010. I also contribute to my children’s 529 accounts (a little, I’m not going to over-fund them). The house isn’t in the best part of town, though not the worst, but my equity is now half its worth. I also drive a $24K 5 year old car (still violating FS’s 1/10th rule, but I don’t splurge in other areas), and I put 10% after-tax into my company’s ESPP, which I think of as 1-2 year short term investing, as well as my near-liquid assets. Live below your means and you can do it.

    • says

      At a $350,000 income, you’re in the 33% marginal tax bracket. I would say no, the Roth 401k does not make sense.

      Here is more info from wikipedia:

      The Roth 401(k) combines some of the most advantageous aspects of both the 401(k) and the Roth IRA. Under the Roth 401(k), employees may contribute funds on a post-tax elective deferral basis, in addition to, or instead of, pre-tax elective deferrals under their traditional 401(k) plans. An employee’s combined elective deferrals — whether to a traditional 401(k), a Roth 401(k), or to both — cannot exceed the IRS limits for deferral of the traditional 401(k). Employers’ matching funds are not included in the elective deferral cap, but are considered for the maximum section 415 limit, which is $53,000 for 2015.

      Employers are permitted to make matching contributions on employees’ designated Roth contributions. However, employers’ contributions cannot receive the Roth tax treatment. The matching contributions made on account of designated Roth contributions must be allocated to a pre-tax account, just as matching contributions are on traditional, pre-tax elective contributions. (Pub 4530)

      In general, the difference between a Roth 401(k) and a traditional 401(k) is that income contributed to the Roth version is taxable in the year it is earned, while income contributed to the traditional version is taxable in the year it is distributed from the account. Furthermore, earnings on the traditional version are taxable income in the year they are distributed, while earnings on the Roth version are not taxable ever.

      There are restrictions on the nontaxability of Roth earnings: typically, the distribution must be made at least 5 years after the first Roth contribution and after the recipient is age 59½.

      A Roth 401(k) plan will probably be most advantageous to those who might otherwise choose a Roth IRA, for example, younger workers who are currently taxed in a lower tax bracket, but expect to be taxed in a higher bracket upon reaching retirement age. Higher-income workers may prefer a traditional 401(k) plan because they are currently taxed in a higher tax bracket, but would expect to be taxed at a lower rate in retirement; also, those near the Roth IRA income limits may prefer a traditional 401(k), since its pre-tax contributions lowers Modified Adjusted Gross Income (MAGI) and thus increases eligibility for Roth IRA contributions. Another consideration for those currently in higher tax brackets is the future of income tax rates in the U.S. (if income tax rates increase, current taxation would be desirable for a wider group). The Roth 401(k) offers the advantage of tax free distribution, but is not constrained by the same income limitations. For example, in tax year 2013, normal Roth IRA contributions are limited to $5,500 ($6,500 if age 50 or older); whereas, up to $17,500 could be contributed to a Roth 401(k) account, provided no other elective deferrals were taken for the tax year (no traditional 401(k) deferrals taken).

      Adoption of Roth 401(k) plans has been relatively slow, and stated reasons for this include the fact that they require additional administrative recordkeeping and payroll processing.[5] However some larger firms have now adopted Roth 401(k) plans, and this is expected to spur their adoption by other firms including smaller ones.[6]

      Here are my thoughts on the only reasons to consider contributing to a Roth IRA, which has similar lines of thinking to a Roth 401k.

  14. James says

    I have about 50,000 in my 401K currently. I have been working for 4.5 years at my company putting away 6% which they match away a year. I will be turning 30 this November 2015. It sounds like this is not enough. Wondering if you have any suggestions.

  15. Kevin says

    I’m 45 yrs old and just got divorced(not my choice), my wife never worked in our 11 year marriage and half my 401k went to her. I’ve got $70k at age 45. Not to mention I’m paying $3500 month in child support and alimony, although aliminy for only 2 years. I make good money. I just bought a $85,000 house(it’s actually quite nice and totally remodeled). I’m saving every dime I can for the next 6 years which should be about $70,000/year in my 401k and IRA and Motif funds. The $70k includes about $8k of company match a year.

    In 6 years I predict to have about $700,000 in retirment at an interest rate of 8% avg. I agree that 401ks suck generally other than the free match which isn’t enough. Personally I put 60% of my 401k funds into a target retirment fund becuase I know no matter what happens that I’ll avg around 5-6% return over time. I’m tired of investing in all these aggressive funds that do nothing but tank every 7-8 years and u lose 40% and start all over only time is against you now. My other investments I do invest a little more aggressively with Motiff which is a pretty cool way of investing btw with lowest fees around.

    Ok now my main point, lol sorry, I’m not buying that I’ll beed 75-80% of my last years income during retirment every year. I know it depends on how u want to live in retirment, travel etc.. But I’m thinking 60% is more realistic. Sure inflation goes up on all things but I won’t have a mortgage or car payment or credit card debt. One thing I would recommend is to use one of those retirment spend calculators to give u an estimate of what u might spend monthly. It helped me as it pointed out spend I didn’t think of, like supplemental health insurance, property tax, other insurance etc.. I make $155k a year but as a single guy in retirment(likely) my monthly bills will be around $3500 month, hardly 80% of my income, not to mention if I take SS at 67 I’ll collect a $2900 mo SS check.

  16. NH says

    WOW!!! $8,000 contribution per year at the age of 23?! $40,000 job straight out of college? A *JOB* straight out of college?? That is one extremely lucky kid…

    Okay, here is a word problem you guys might like…

    Suppose you have a client in his late 30’s, making about 50k as a Systems Analyst in the financial industry as primary income earner for family of four (HH income of ~65k in midwest, lower cost of living). Client has $30K in a managed 401k with Vanguard, adding $2,500 per month, soon to be $5,000/mo (woopie!!).

    Client budgets every month to the dime, so he knows the family is running as streamlined as possible with regard to income. Basically living paycheck to paycheck (minus savings, his family ends up spending entire monthly budget). Oh and many things fall apart routinely or family gets bored, so there is a general $100-$200 ish monthly drain for car repairs / home maintenance / swimming lessons / gifts / holiday of the month / you name it miscellaneous costs.

    So with zero to spare what would you and your readers recommend to someone in this person’s situation with a goal of maintaining their standard of living into retirement? And I swear to all that is holy, if somebody says, “stop eating out” I’m going to shake my fist at the imaginary internet gods. Assume client always uses BOGO coupons when eating out (ie, only on weekends), and regular coupons whenever possible for practically everything else.

    Does the wife need to be kicked in that ass to get a better job? $65k HH income is pretty much the minimum for a family of four in midwest, from what I have read. Should the client kick himself? I don’t know if $50k is a fair salary for a Systems Analyst w 10 years experience around here.

    Should the client say, “Screw it, I have less than 300k in the bank right now, so I’m going to be broke, so I might as well enjoy living in the now, and stop saving at all!” What would YOU do, NOW?

  17. Jake says

    This is a joke, there is no need for this kind of money to retire. Broad based equity diversification has historically (and will continue) to provide yields equal to the growth of the world economy. this means the person putting only 10 K a year into a 401K tax deferred will have 800 K in inflation adjusted dollars in only 30 years (age 52). Without ever touching the principle of his investment this person will make 40 K a year (inflation adjusted) for infinity(you may actually die someday, so you can always spend some of the principle too). Debt free this is an excellent income. I’m all for savings! but no one needs millions to retire unless the want to live like a millionaire, and most self made millions to NOT live like millionaires.

  18. zia3000 says

    What are we supposed to do in the meantime? Eat grass and live in cardboard boxes?

    All I hear is “Save for retirement!” Life in retirement is not that great. Yeah, sure, you’ll have money to travel, but have you seen how retired people travel? They get herded around like sheep, eat at restaurants that cater to bland, and end the night at 8pm. Is that the life?

    And yeah, you’ll have money for medical bills, but is that what it’s about? Work your ass off and save all your money only to be greeted with sickness and misery? If you’re sick, there’s nothing money can buy that will make you feel better.

    You definitely need money in retirement but let’s take it down a notch. We don’t need millions…we can survive on a lot less. All those millions you saved up by busting your ass will just go to your kids, anyway!

    I’ve been good and bad with money. I’m addicted to traveling and having life experiences. I spent most of my life driving beat up cars and living in affordable places, but I have spent a TON of money traveling. I’ve taken two six-month trips to backpack across Asia, Europe, Egypt, New Zealand…in total I’ve been to 46 countries. I cashed out my first 401K to travel – it was only $10,000. I know how much it would have been over blah blah blah years compounded interest blah blah blah average return blah blah blah.

    But here’s the thing: I’m 39 years old and I have $250,000 in my 401K. I’m not entirely happy with it, and I haven’t contributed anything to it in 5 years, but I think it’s okay considering my frivolity. In 2010, I quit a well-paying job ($110K) with great benefits with a large corporation to work for a small company with four employees, half the pay ($60K), and no benefits. But I loved the new job and I was married at the time so it was great.

    Then I quit my low-paying job after two years to travel for six months (that damn bug). When I came back my wife left me, which was a total surprise! I struggled to get on my feet and got in credit card debt ($14K). I’m now working as an independent consultant for the same small company as before. But since I work for myself I pay for everything myself: medical insurance, taxes, expenses, mortgage, condo fees, everything! And I have no benefits or vacations. Snow day? Sick? Hung over? No pay.

    I make about $75K a year now but I pay $800 a month toward my credit card, and live on a pretty tight budget. I’ve had to turn down trips with friends, weddings, bachelor parties and that has sucked a little. But my travel bug is hibernating and I feel like I’ve experienced so much that I’m not really missing out on anything. Once I pay off my credit card (hopefully, mid-2016) I plan to start my own 401K. Meanwhile, life’s moving along…at a much slower rate and with a lot less pizzazz, but it’s cool.

    My point of all this is: life happens. It’s not easy to follow a chart. Life is stressful as it is. We all succumb to the desires of just being human and we need a break from it all. We want to travel and see the world; eat at nice places; go to shows; and spend time with friends and the ones we love. We want to look good, feel good and be good. It’s hard to do everything.

    So contribute what you can. Don’t be a penny-pinching miser who misses out on life because he’s too worried about retiring, just be smart about it. Read good books on investing and learn what it all means. Pick your funds carefully. Index funds with low management fees are good. Rebalance your portfolio every 6 months. Get that company match. And put all your performance and holiday bonuses in your 401K.

    Lastly, don’t worry so much…even the homeless get to eat!

  19. Justin says

    I thought I knew what I was doing but I think I’m confused now on where I should be saving…

    I’M 26 and make 70k a year. I put away 8% into my 401k and my employer will match 50% up to 6%.

    I also put away 6% into a employee stock purchase plan and they contribute $.33 cents on a on going basis.

    the last 2 years I have been maxing out my wife’s ROTH IRA which is $5,500 a year.

    I put $170 a month in one mutual fund and $120 into another mutual fund once a month.

    My question is.. should I be putting more money into a certain account rather than the other?
    Should I contribute less into my wife’s ROTH IRA and put more into my 401k?

    Any advice would be great and extremely helpful. Knowledge is power!

    If needed my wife makes around 42-45k a year.

    Thank you.

  20. Justin H says

    I’m 40, coming from a military career and never had a 401k. Currently making $40k a year, though the company does not do a match, but will when the company is profitable contribute a percentage of your income into the 401k. I currently own a couple house, one of which will be paid off in 4 years and a double that I live in which is being refinanced into a 15 year mortgage. Our total mortgages & taxes are about $2750 and they earn $2400 per month. I’m currently saving about 55% of my income. Now that I’m eligible to contribute to a 401k I was originally thinking of contributing $300 a month or 10%, but I’m not sure. Which would allow me to save about $15k per year cash.

    Being that I have income property, which was my plan to be a large part of my retirement. My issue is I have a kindergartener, who I may send to private school, plus updating the house and I simply like to have cash on hand or at least readily available for emergencies, etc.

    Is there a good amount to contribute or being nothing is being matched?

    Thanks

  21. Miranda says

    You all work with far more income than we had even before all the lay offs when my husband and I both worked. my 401K is in limbo with my last job. I have no new job to transfer it to and no steady income to invest into it. I am considering a roth. So I actually have a question you may be able to answer. When it comes to my husbands 401K. Is there a sweet spot we can find when deciding on a investment amount. I am thinking we may be able to find how much we can invest that will lower his tax bracket? So maybe we can invest more and still have more income. Or at least more invested in us and our future instead of other peoples abilities to make bad decisions.

    • Magus says

      401k and traditional IRA are great for tax deductions. If your marginal tax rate is 10-15% you might want to do a Roth IRA but otherwise just do 401k or traditional IRA for the tax deduction. 401ks shouldn’t be in limbo unless the 401k is in company stock only in which case that is a big red flag as those are hosted by a third party (deferred comp plans for HCEs are not protected, however)

  22. Dontlikebeinganeng says

    29 year old
    Oil and Gas Engineer
    Been stashing full ROTH 401k and ROTH IRA backdoor contribution since 26 (started working at 22).

    Currently at 150k in 401k and 23k in ROTH IRA.

    Income is $~160k/yr

  23. Curious says

    The Maths is simplistic. For someone (22+15=37 or older) who went through 2000, and 2008 – and given the fact that 401K basically invests in stocks, its not a linear calculation (compounding aside). For example, the point being – someone at 22 who invested $8K in 401K in 2000, just before it nose-dived will NOT have a low-end-high-end of $8K-$18K after 1 year as your table predicts. A realistic approach would be to follow some index over the last 30 years to make such a table, or at least add such a table in the analysis.

    I hate articles all over msn.money or finance.yahoo which explain the concept of compounding as if written to 8th grade Math students. The catch – “assume” a return of 6% or 8%, as if!

    Hedge funds and luck aside, one has to be realistic, in what markets return – even negatively, let alone “assuming 8% return, a $10K invested annually will result in $3M over 40 years, kind of stupid articles”.

  24. PAE says

    I love these comments “Lets say a couple at 65 was making $250K when they retired” WTF??? That’s like the old joke “How do you make $2MM? First, get $1MM, then….” If you make enough to be in the top 5% income range in the USA, I would hope for sure, you have enough brains to know how to save, live below your means, and be set for retirement at 65!!! The main uselessness of this particular article is it does not at all indicate WHEN you are retiring. Obviously the numbers can’t be the same for someone retiring at 45 vs 65! It’s just some more info to add to your data points of what you need when considering. A single chart is only the authors opinion, it can not cover individual scenarios. The authors standard reply of “by making the numbers higher, it will inspire you to save more” is not very helpful. It only depresses and angers those that are nowhere near those numbers. The reality is you have to use Retirement Calculators that force you to estimate your current and future expenses, current and future savings & assets, birthdates and retirement ages and then plot your future income from retirement to death. These are available all over the internet, most for free. You absolutely positively cannot ask a question of “I’m this old, make this much, what should I do?” How naive type, and expect any meaningful answer from Sam other than “Save 50% of you income”. Which for most people is plain unrealistic.

    Also saying “Assume there will be no SS” to someone that is 58, for instance, is plain wrong and does a disservice, rather than provide a service. AARP is the strongest political lobby in the US. SS will never go away, but it will have to change some.

    Delaying SS to increase your COLA adjusted payments and reduce your AGI helps diffuse the Tax Torpedoe, by using your taxable IRA/401k to replace SS in the meantime, is a far more important point to make for the normal person that will work until they are 60ish.

  25. Musef says

    I turned 30 about six months ago. I’ve worked at the same company since out of college, just over nine years, started at 60k, now I’m just over 105k including bonuses. My parents were nice enough to pay off my college loans so I had a great debt-free start. I didn’t max out my 401k contributions until my second year and have tried to max it each year since.

    I agree for most people this is not an easily obtainable goal. Most of my friends whom started at similar time as me have no where near what I’ve got accumulated. Buying a nice car, a big house on a high interest loan, getting married early and having kids can set you back.

    Two years ago I began an MBA program which will cost just north of $100k when it’s said and done. I wanted to finish it in two years but quickly ran out of money. Work only covers $5.25k per year so I’m responsible for the vast majority. Paying $10k a semester really drains your savings. At this point I’m targeting 3.5 years, taking one class each semester with no loans. BTW, graduate loans really suck, mine was about 5.5% interest that starts accumulating as soon as you receive the funds, not when you graduate. I initially took a small loan and paid it off within a year after realizing the awful terms.

    What saving for retirement has taught me is an enormous need for discipline. Although I feel like I’m ahead of the game at this point, I’ll still hold off on buying a new car (Audi A7!) or taking an expensive vacation in order to ensure I max out my 401k each year. I know many think that trade off is stupid, that I’m giving up living while I’m still young but watching my 401k grow gives me a little hope that my best days are still ahead of me. In some ways I like having less than $10k in my checking account at any given time. It prevents me from having succumbing to spending urges and splurging on something I’ll eventually regret.

    As of today I have 254k in my 401k and 44k in my cash pension for a combined total of $298k. Three years ago my employer opened up a brokerage option in my 401k plan, allowing us to transfer upto 50% of our funds into it. It does have some nasty fees, 20 bucks each quarter, $20-50 per mutual fund purchase, no ETF or individual stock purchase capability. Even with all of its limitations I knew it was a better choice than my index funds. I spent evenings studying about mutual fund classes and ended up buying a fairly aggressive mix of mutual funds which included about 25% biotech. This has paid off handsomely and the brokerage portion of my 401k has grown much faster than the other half.

    I know currently I’m still ahead of Financial Samuari’s savings guideline. I’ve worked hard to get there and hope to continue to beat it. Unfortunately I don’t expect any big raises or promotions at work anytime soon so I’ll let my investing be a way of supplementing my income. I believe the stock market is a rising tide that floats all boats even through the occasional crash and each dollar saved today can be worth so much more in the future.

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