The 401k is one of the most woefully light retirement instruments ever invented. The maximum amount you can contribute is $19,500 for 2020, up from $19,000 in 2019.
The worst is the IRA 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 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 November 2019 is around $106,000 according to Fidelity’s 12 million accounts, thanks to consistently strong returns in the S&P 500 since 2009.
Unfortunately, $106,000 is an incredibly low amount given the median age of an American is 36.5. Further, the median 401k amount is closer to only $30,000.
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 By Age
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.
* 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. $56,000 a year is the total amount that can be contributed to a 401k by employee and employer for 2019 (employer can contribute $37,000).
* 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 401(k) Retirement Savings Guideline
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.
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 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.
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 versus $25,000 for public university tuition and $40,000 for private university tuition on average today.
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, and we’re all in good health. Does that sound affordable for the average American household who makes $63,000 a year? Absolutely not, which is why employees should not underestimate the value of their overall work benefits.
To help grow your net worth, I recommend diligently tracking your net worth with the plethora of free online financial tools. 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 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!
Recommendation To Build Wealth
Manage Your Money In One Place: 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.
Updated for 2020 and beyond. For those who are really motivated, the estate tax threshold is $11.4 million per individual. The time to make your fortune is during a bull market when tax incentives are the greatest. Be diligent about saving and tracking your finances. You never really know when the bad times will return as the yield curve starts to flatten.