The 401k is one of the most woefully light retirement instruments ever invented. The maximum amount you can contribute for 2017 remains at only $18,000 pre-tax.
The worst is the IRA which limits you to contributing only $5,500 in pre-tax dollars only for individuals making under $72,000 a year and married couples making under $119,000 a year for 2017.
Meanwhile, you have to make less than $133,000 a year as a single or $196,000 as a married couple in 2017 for the privilege of contributing $5,500 in 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 401k or IRA any time! At least with the 401k, anybody can contribute.
The average 401k balance as of Dec 2016 is around $100,000 according to Fidelity’s 12 million accounts, thanks to an incredible 32% total return in the S&P 500 in 2013, 13.7% increase in 2014, 1.4% increase in 2015, and a 7.8% increase for 2016. We’re at new record highs and the S&P 500 is now up close to 200% since the depths of the financial crisis in February 2009.
Even so, $100,000 is an incredibly low amount given the median age of an American is 36.5. Further, the median 401k amount is closer to only $25,000. 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 401k’s 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 2017), 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
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.
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.
DEPEND ON 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, try and contribute at least 20% of your after-tax income after 401k contribution to your savings or retirement portfolio accounts.
This 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 75 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 after-tax brokerage account where you can consistently contribute a percentage of your paycheck each month. Your goal should be to then build as many passive income streams as possible.
Challenge yourself to raise your after-tax and 401k contribution savings percent 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.
A straightforward way to maximum savings 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!
RECOMMENDATIONS TO BUILD WEALTH
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Updated for 2017 and beyond. With the bull market eight years in the making, I encourage everyone to track their investments as close as ever. X-ray your portfolio for excessive fees. Make sure you have a proper balance of stocks and bonds as well. Do not start from scratch like many investors did in 2000 and 2008 because they weren’t on top of their money!