Are you wondering how much should I have in my 401k at age 40? Good for you to wonder because age 40 is a big financial milestone.
By age 40, you should be in your prime earning years. You should also be seriously thinking about retirement planning. You may only want to work for 10-20 years. Actually, you may already be feeling burned out.
For the above-average 40 year old, s/he should have somewhere between $200,000 – $750,000 in their 401k. The amount range depends on when you started investing, how much you've been contributing each year, and your returns.
If you are only 25 years old reading this, you should have closer to $750,000 in your 401k in 15 years. If you're 40 years old reading this post, then you may likely have closers to only $200,000. When you were contributing, the 401k limits were lower. For 2022, an employee can now contribute $20,500 to their 401k.
If you are a Financial Samurai, then you should have closer to $500,000+ in your 401k by age 40. Since 2009, Financial Samurai has ben producing the best content on how to help readers achieve financial freedom sooner, rather than later.
The Importance Of The 401k For Retirement
The 401k is one of the most woefully light retirement instruments ever invented. The maximum amount you can contribute for 2021 is $19,500. It should go up by $500 every 2 – 4 years based on history.
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 2022 is around $120,000 according to Fidelity's 12 million accounts. The bull market since 2009 has significantly helped boost the average 401k balance. Who knew the S&P 500 would rise by 16% in 2020, and 27% in 2021 as the coronavirus pandemic froze global economies.
$120,000 sounds like a lot of money. However, it is an incredibly low amount given the median age of an American is 36.5. Further, the median 401k amount is closer to only $28,000.
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 Saved In Your 401k By Age
In order to determine how much one should have in his or her 401k by age 40, I've made the following assumptions.
* 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. 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 rate of return assumptions are between 0% – 10%.
* Company match assumption is between 0% – 3%.
* The Low, Mid, and High columns should successfully encapsulate about 80% of all 401K contributors who max out their contributions each year. 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 Savings Guideline
Below is my 401k by age savings guide. Notice the row at age 40.
From the results, the average 40 year old should have between $200,000 – $750,000 saved up in their 401k, depending on company match and investment performance. If you're looking for a realistic goal, then focus on the Middle column all down the chart.
We know that due to inflation, a dollar today will not go as far as a dollar 30+ years from now. Private school tuition will probably cost over $100,000 a year in 20 years versus $25,000 for public university tuition and $40,000 for private university tuition on average today. Inflation in 2021 was an astounding 7%!
So who knows what medical, food, shelter and energy costs will cost then. One thing is for sure, prices will be much higher. For most people, you should aim to have about $550,000 in your 401k by age 40.
Invest In Real Assets To Boost Wealth
What we do know is that housing prices have outpaced wage inflation by more than 3.5X since 2000. Therefore, not only should you invest heavily in your 401k, you should also invest in real estate.
In a rising interest rate environment, investing in real estate can be beneficial. Not only will rent prices increase, but so will property prices. Further, the real cost of debt gets whittled down.
At least be neutral real estate by owning your own primary residence. To get long real estate, I would buy rental properties and invest passively in real estate crowdfunding.
My favorite two real estate crowdfunding platforms are:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified real estate portfolio is the best bet.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot of capital, then you can build your own select real estate portfolio with CrowdStreet.
Both platforms are free to sign up and explore. Personally, I've invested $810,000 in real estate crowdfunding to diversify my holdings and earn income passively. Below is my dashboard where I've received over $499,000 in distributions since 2017.
Save Early And Often In Your 401k By 40
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.
At age 40, you should really have closer to $500,000 or more in your 401k. 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.
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.
Take it from me, someone who left the work force at the age of 34 after saving 50%+ for 13 years. There's not a day that goes by where I'm not thankful for working extra hard and making certain financial sacrifices to be free.
And if you're curious to know how much I have in my 401k at age 43, the answer is about $1,500,000. The number comes from the total of $940,000 in my rollover IRA, $240,000 in my Solo 401k, and $350,000 in my SEP IRA.
Recommendation To Build Wealth
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. You will 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. You can analyze your 401k for asset allocation and excess fees.
After you link all your accounts, use their Retirement Planning calculator. It 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. As a result, I have seen my net worth skyrocket during this time thanks to better money management.
How Much You Should Have In Your 401k By Age 40 is a Financial Samurai original post. I've been publishing since 2009 to help people achieve financial independence sooner, rather than later. Sign up for my free weekly newsletter.