Are you wondering what the appropriate 401k by age amount is? This article will go through a detailed analysis as to what above average people who want to achieve financial freedom are contributing to their 401k plans.
With the 401k maximum contribution limit rising to $19,500 for 2020, Americans have one of the most powerful pre-tax retirement savings vehicles today. The median household income in America is roughly $64,00. Therefore, being able to contribute $19,500 is equivalent to saving 30% of your gross income each year.
Unfortunately, the average savings rate in America is 6% or less. With pensions going away and Social Security underfunded by 25%, it’s more important than ever to rely on your pre-tax and post-tax retirement contributions.
For perspective, the average 401k balance as of 1Q2019 is around $103,700 according to Fidelity’s 12 million accounts. This is thanks to an incredible 200% increase since the bottom of the financial crisis in 2009. For 2020, the average 401k balance should be even more.
Even so, $103,700 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 guide. The table shows how much each person should have saved in their 401k’s at age 25, 30, 35, 40, 45, 50, 55, 60, and 65 to live a comfortable retirement life.
Remember, there is NO REWIND button in life. Save early and invest often. You don’t want to get to a point in your life where you no longer work only to find out that you don’t have enough to take it easy.
401k By Age Chart For A Better Retirement
The assumptions for the below chart are as follows:
- The Low End column accounts for lower maximum contribution amounts available to savers above 45.
- The Mid End column accounts for lower maximum contribution amounts available to savers below 45.
- The High End column accounts for savers who are under the age of 25. After the first year, one maximizes their contribution every year to their 401k plan without failure.
- 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. The maximum contribution should go up about $500 every two or three years based on history.
- No after-tax income contribution, although more power to you if you have the disposable income to do so.
- The rate of return assumptions are between 0% – 10%. Over a 10 – 30 year period, this assumption is correct, despite the occassional recessions that provide negative returns.
- The average company match is 3% of salary or up to $3,000 of salary. However, as of 2020, employers can now contribute up to $37,500 a year in company match or profit sharing. The total contribution is $57,000 a year to a 401k.
With these points in mind, you can see what my recommend 401k by age numbers are in the chart below.
401k Savings Targets By Age Chart
From the results, we can see that even after 38 years of consistent saving, everyone should be a 401k millionaire, and have the purchasing power of a millionaire. The most powerful force in retirement savings is compounding. As your amounts get larger, the returns get larger.
If you’re just starting your 401(k) savings journey, you have a good possibility of achieving the high end column with consistent 8%+ annual growth and company profit sharing after 38 years. The average total annual return in the stock market is 10%.
But it’s most likely that most people reading this article will should follow the middle-to-low end columns as a 401(k) savings guide. The median age of readers for this article is roughly 35 years old.
Inflation Forces You To Invest Aggressively
Inflation diminishes the purchasing power of your money. In other words, a dollar today can buy much more stuff than a dollar 20 years in the future.
As a result, you must get neutral inflation by at least owning your primary residence. Real estate inflates with inflation. Given inflation is generally up and to the right due to population growth and demand growth, real estate will naturally follow suit.
It doesn’t make sense to short the stock market for decades. In the same token, it doesn’t make sense to short the real estate market for decades by renting. Homeowners literally have net worth figures 40X – 60X greater than the median renter.
Investing in stocks helps get neutral inflation or beat inflation. The reason is because corporate profits for many companies can grow faster than inflation. Just look at companies like Apple, Google, and Nike. These companies consistently outperforming inflation and the S&P 500 index due to superior earnings growth over time.
Costs Are Growing Out Of Control
Then there is the incredible growth of healthcare costs that is the most worrisome for retirees. For example, I’ve been paying $1,750/month in monthly premiums for a platinum plan for my family of three. Yet, we’re all in good health.
Paying $21,000 a year in healthcare premiums can be crushing for families who want to retire early. Healthcare is one of the main reasons why it’s recommended to work as long as possible to take advantage of your company benefits.
Take a look at this inflation chart from 1996 – 2017. Medical Care, Childcare, College Tuition are the most worrisome for those who plan to raise a family.
To help grow your net worth, I recommend diligently tracking your net worth with Personal Capital, the #1 free personal finance tool on the web. Technology has come a long way since tracking our money by hand or with an Excel spreadsheet. Remember, what is measured can be optimized.
401k By Age Means Depending On Yourself
To achieve my recommended 401k by age figures, you must max out your 401k each year. Then contribute even more in after tax dollars if you can.
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 after-tax retirement accounts.
Below is a base case scenario where a financially prudent household contributes to their 401k and after-tax accounts. The after-tax or taxable investment accounts are get to generating passive income.
You can no longer depend on Social Security and Pensions. The new three-legged retirement stool consists of You, You, and You. The third you is side hustles or finding a part-time job in retirement. Supplement your retirement income.
The more passive income you can bring in from your after-tax investments, the better.
After at least 10 years of consistent savings, you will be amazed at how much money you’ll end up saving. There is no sacrifice when you start experiencing financial security. Financial freedom is the best thing anybody can ask for!
401k By Age Management Recommendation
Sign up for Personal Capital, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing. I’ve been using Personal Capital since 2012 and have seen my net worth skyrocket during this time thanks to better money management.
About the Author: Sam worked in investment banking for 13 years at GS and CS. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income boosted by his investments in real estate crowdfunding.
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