Saving enough in my 401k to quit my job is something I thought a lot about years leading up to my departure in 2012. In 2012, I finally decided I had saved enough in my 401k and negotiated a severance worth six years of living expenses.
If you're like the majority of working people, you probably have access to a 401k plan through your employer. After all, it is one of the most common investment vehicles available to us.
But if you're like most people, you're probably not maximizing your 401k investment potential that these retirement accounts offer.
Remember, 401ks offer a wealth of benefits, including:
- Money to live on later in life after years of compound building
- Reduction of your taxable income dollar-for-dollar
- Tax-free returns until required minimum distributions
- Company-match of a certain percentage of YOUR contributions
It's a gold mine opportunity, but only if we use these accounts. If they are sponsored by your company, make sure you're participating.
If you aren't, make it a top priority to ask about your options. And, be aware of your options for free wealth management that exist for all of us.
Am I Saving Enough In My 401k?
The average 401k balance as of 1Q2021 is around $120,000, according to Fidelity’s 12 million accounts and thanks to:
- 32% total return in the S&P 500 in 2013,
- 13.7% increase in 2014,
- 1.4% increase in 2015,
- 7.8% increase in 2016,
- 19.6% increase in 2017
- -6.4% decrease in 2018
- +31% increase in 2019
- +18% increase in 2020
The S&P 500 is now up more than 250% since the depths of the financial crisis in February 2009,
Even so, $120,000 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, which is hardly enough to retire on for more than one year.
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 ages beginning at 22.
I like to call it the “Retirement Savings Guideline“.
Financial Samurai 401(k) Retirement Savings Guideline
If you’re just starting your 401k savings journey, you could get lucky and achieve the
After all, the maximum 401(k) contributions will be much higher over the next 38 years than the previous 38 years. That only stands to reason.
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 in America is roughly 36, and the median age of a Financial Samurai reader is closer to 38.
The Downsides To A 401k
Just like commercials very often state, “restrictions apply”. The fact is the 401k program is such a good deal, the government has limited how much we can invest in these accounts.
What are these restrictions?
The maximum amount you can contribute is $19,000 for 2019, but that is up from $18,500 in 2018. Okay, a $500 increase. I guess we'll take it!
The IRA is even worse, which limits you to contributing only $6,000 in pre-tax dollars only for individuals making under $72,000 a year and married couples making under $119,000 a year.
Meanwhile, you have to make less than $122,000 a year as a single or $193,000 as a married couple for the privilege of contributing the maximum $6,000 in
Force Yourself To Max Out Your 401k
The absolute minimum that you can do is to max out your 401k retirement account throughout your working career.
Start small and slowly work your way up. If you aren't saving anything now, open a 401k account and begin throwing at least your company match into your account. If your company doesn't match, then start at 5%.
Then, slowly work your way up.
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.
Here is a base case scenario where a financially prudent household contributes to their 401k and after-tax accounts. After-tax contributions are necessary for generating gross passive income if you want to retire early.
After all, you can't touch your 401k money without penalty until 59.5. But if you want to leave the work force before 59.5, you need passive income.
And, don't think that you can depend on Social Security and Pensions. Those were the good
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 that you enjoy that also brings in some income.
Being happy, while still earning an income, is an amazing combination.
The more passive income you can bring in from your after-tax investments and the more you can bring in some enjoyable income in retirement, 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!
Related: How Much You Should Have Saved In You 401k By Age
Quit Your Job Comfortably By Saving
And, it all begins with knowing your money picture. The easiest way to keep track of your finances is to 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 started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school working at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has a total of $810,000 invested in real estate crowdfunding.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $220,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies and writing online to help others achieve financial freedom.