Are you looking for a 401k savings guide? This post will go through how much I think you should have in your 401k by age in order to have a comfortable retirement.
The 401k is one of the most woefully light retirement instruments ever invented. The maximum amount you can contribute is $20,500 for 2022, up from $19,500 in 2021. A 401k is part of your three-legged retirement stool. The other two legs include your after-tax investment accounts and your side hustles.
Although the 401k pales in comparison to a nicely funded pension, even more disappointing than the 401k is the IRA. With the IRA retirement plan, you can only contribute $6,000 in pre-tax dollars. Further, you can only contribute if you make under $76,000 a year as an individual and $125,000 as a married couple. What about the rest of us?
Meanwhile, you have to make less than $140,000 a year as a single person or $208,000 as a married couple for the privilege of contributing the maximum $6,000 in after- tax dollars to a Roth IRA. I do not recommend doing this 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.
Average Retirement Balances
Based on Fidelity’s 2020 study, here are the average retirement balances for the IRA, 401(k), and 403(b).
- The average IRA balance was $111,500, a 13% increase from last quarter. It is slightly higher than the average balance of $110,400 in 2019.
- The average 401(k) balance increased to $104,400 in Q22020, a 14% increase from Q1 but down 2% from a year ago. For 4Q2020, the average 401(k) balance rose to roughly $120,000.
- Average 403(b) account balance increased to $91,100. This is an increase of 17% from last quarter and up 3% from a year ago.
Given the stock market has continued to do very well in 2021, the average 401k savings by age is likely up another 5% – 10% this year.
The Average 401k Balance By Age
Let’s focus on the 401(k) and what people should have in their 401(k) by age. The entire goal is to accumulate enough money in your 401(k) and other retirement accounts to eventually live financially free.
The average 401k balance at the end of 2020 was roughly $120,000. Therefore, what should the 401k savings by age be today? Given the median age in America is about 36 years old, the average 36-year-old should have a 401k balance of around $120,000. Unfortunately, $120,000 is still pretty low.
Below is the average 401k savings by age range as of 4Q2020 according to Fidelity. It’s great to see the average 401k savings at retirement age rise to $229,100. However, that’s still not enough to live a comfortable retirement lifestyle.
As an educated reader who is logical and believes saving for retirement is a must, I’ve proposed a 401k savings by age recommendation table that shows how much each person should have saved in their 401k at age 25, 30, 35, 40, 45, 50, 55, 60, and 65. The amounts are much greater than the average 401k savings by age in America.
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. By age 65, you will have had 40+ years to save and investment already!
401k Savings By Age: How Much You Should Have
To determine how much you should have saved in your 401k by age, I’ve come with some assumptions that have encapsulated in a chart below.
The assumptions for the below chart are as follows:
- Low End column accounts for lower maximum contribution amounts available to savers above 45.
- Mid End column accounts for lower maximum contribution amounts available to savers below 45.
- 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.
- 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% – 100% of employee contribution. $58,000 a year is the total amount that can be contributed to a 401k by employee ($19,500) and employer ($38,500) for 2021. But it goes up to $61,000 total 401k contribution for 2022.
- 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 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 By Age Guide
From the results, we can see that even after 38 years of consistent saving, you’ll only have around $1,000,000 to $5,000,000 in your 401k in a realistic cycle of bull and bear markets. In other words, I believe everybody should become 401k millionaires by 60.
If you’re just starting your 401(k) savings journey, you could get lucky and achieve the high end column with consistent 8%+ annual growth and company profit sharing after 38 years. After all, the maximum 401(k) contributions will be much higher over the next 38 years than the previous 38 years.
But it’s most likely that most people reading this article should follow the middle-to-low end columns as a 401(k) savings guide. The median age in America is roughly 36. Meanwhile, the median age of a Financial Samurai reader is closer to 38.
Investing Matters Because Inflation Matters
Let’s say you live for 25 years after retiring at 60. You only get to live on $40,000 – $100,000 a year on the low-to-mid end. Sounds feasible in today’s dollars, but not so much in future dollars due to inflation.
If goodness forbid you live for 35 years after retiring at 60, then you can only live off of $28,571 – $71,000. If we use a 2% inflation rate to calculate what $1,000,000 – $5,000,000 is worth today, its only worth about $5500,000 – $2,355,000.
We know that due to inflation, a dollar today will not go as far as a dollar 30+ years from now. Private university tuition will probably cost over $100,000 a year in 20 years. That is ridiculous since education is now free thanks to the internet.
Then there is the incredible growth of healthcare costs that is the most worrisome for retirees. For example, I’ve been paying $23,000+ a year in healthcare premiums for a platinum plan for my family of three. This is despite us all in good health.
Does that sound affordable for the average American household who makes $68,000 a year? Absolutely not, which is why employees should not underestimate the value of their overall work benefits.
In fact, inflation is the reason why it takes $3 million to be a real millionaire today. Make sure you own assets like stocks, real estate, and more to let inflation work for you!
To help grow your net worth, I recommend diligently tracking your net worth with Personal Capital. Technology has come a long way since tracking our money by hand or with an Excel spreadsheet. Remember, what is measured can be optimized.
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 by on the right 401k savings by age path. Below is a chart that shows what you could have in your 401(k) if you max it out each year starting in 2022. The right hand column shows what you would have in your 401(k) with 8% compound annual returns.
In other words, everybody who consistently maxes out their 401(k) each year will likely be a 401(k) millionaire by the time they turn 60.
After you contribut 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. It’s 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. 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!
Taxable Investment Portfolio Is Key
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. Consistently contribute a percentage of your paycheck each mont into your taxable investment portfolio.
Your goal should be to then build as many passive income streams as possible. The more passive income streams and active income streams you have, the more financially free you will be.
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. Save every other paycheck for the rest of your working life.
Max out your 401k and save over 50% of your after-tax income for at least 10 years in a row. If you do, you will be financially free to do whatever you want!
Recommendation To Growing A Large 401k
Now that you know what the appropriate 401k savings by age is, it’s time to manage your finances like a hawk. To do so, sign up for Personal Capital, the web’s #1 free wealth management tool. Personal Capital will enable you to get a better handle on your finances.
In addition to better money oversight, run your investments through their award-winning Investment Checkup tool. I will show you 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. 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.
To track my 401k savings by age guide you must max out your 401k each year. With investments returns coupled with company matching, you’ll be amazed how much you will accumulate over the years.
I’ve been using Personal Capital since 2012. In this time, I have seen my net worth skyrocket thanks to better money management.
Build Wealth Through Real Estate
In addition to investing in stocks and bonds through your 401k, I recommend diversifying into real estate as well. Real estate is a core asset class that has proven to build long-term wealth for Americans. It’s important to own a tangible asset that provides utility and a steady stream of income.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Inflation is picking up steam, which further boosts the value of real estate.
With real estate, you can earn a steady stream of passive to semi-passive income well before age 59.5, which is when you can withdraw from a 401k penalty-free.
Two Favorite Real Estate Platforms
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds and eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most investors, investing in a diversified portfolio is the best way to go.
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. They also have higher rental yields, and potentially higher growth due to job growth and demographic trends.
Both platforms are free to sign up and explore.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects. My goal is to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Follow my 401k savings by age guide. But in the meantime, also build a passive income portfolio so you can live a better life today. Given you cannot withdraw from your 401k without penalty until 59.5, it is your passive investment portfolio that matters even more.
How Much Should I Have Saved In My 401k By Age is a Financial Samurai original post.