The 401k is one of the most woefully light retirement instruments ever invented. The maximum amount you can contribute is $19,500 for 2020. Let’s go through how much 401k savings by age you should to live a comfortable retirement.
Although the 401k pales in comparison to a nicely funded pension, even more disappointing than thee 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 $72,000 a year as an individual and $119,000 as a married couple. What about the rest of us?
Meanwhile, you have to make less than $139,000 a year as a single person or $206,000 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.
The Average 401k Balance
The average 401k balance as of 1Q2019 is around $103,800 according to Fidelity’s 12 million accounts. The average 401k balance should be higher in 2020 given the S&P 500 increased by 30% in 2019. That said, we went through a doozy of a first quarter, but have since recovered.
Unfortunately, $103,800 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. Then you add on the bear market in 2020 and the average 401(k) balance is most likely even lower.
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 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!
401k Savings By Age: How Much You Should Have
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. $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 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.
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. 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 $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 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.
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 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 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.
I’ve been using Personal Capital since 2012. In this time, I have seen my net worth skyrocket thanks to better money management.
Updated for 2020 and beyond. Despite, the coronavirus pandemic, your 401k savings by age should continue to mirror my guidelines for a healthy retirement. For those who are really motivated, the estate tax threshold is $11.58 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. Times are now very volatile.
Oye, this is depressing. I am SO far behind at 35…
Don’t worry You have time – I started at age 31 and caught up – life happens but it is never too late to get focused and disciplined. The 401K is a great way to defer taxes. I wish I had taken more risks with more equities. Best of luck –
Great article!
The tax advantages that the average employee gets when contributing to employer sponsored retirement accounts AND their own individual retirement accounts/brokerage accounts, are advantages that simply can’t be passed up. The average American worker’s best shot to securing financial independence in today’s world where pensions are gone and Social Security is drying up, is to MAX out their tax-deferred retirement accounts. You brilliantly state that everyone needs to “DEPEND ON NOBODY BUT YOURSELF.” You couldn’t be more accurate in terms of an individual securing their financial independence. By maxing out these retirement accounts and creating new streams of passive income, you dramatically increase your chances of reaching financial independence.
Great post!
We stopped investing in our 401K for a few years after our 2011 home purchase. Thankfully it appreciated dramatically and we are sitting on $300K in home equity. We have no plans to move or sell since our mortgage is lower renting in our area. I like to tell myself that the $300K in equity we built makes up for our smaller 401k and the gains I lost not investing for 2 1/2 years.
So we have $122K in 401Ks + $300K in home equity…. = $422K in retirement savings. Makes me feel better or am I deluding myself. I always say.. we will sell and move to a cheap state in retirement. Pocket the difference in money saved.
Not bad! Guess it would help if you could put what percentage gain $300K is as well.
$422K might be a lot or might not be a lot. Depends on your passive income, age, etc. Only you will know!
I did sell my rental house in SF this summer 2017 and pocket the gains to reinvest in real estate crowdfunding in much cheaper areas of the country. Feels so much better not to have to deal with the rental anymore.
You are deluding yourself, because you cannot sell that house when you retire unless you are okay living in a tent.
What’s most interesting to me is that I recently learned what the 401k was actually set up for. It was never meant to be the main way we save for retirement. Only after questioning why that is so recommend did I see some big problems with it.
Thanks for putting this post together so I can share it with others who think I am crazy for saying the 401k isn’t always the best option for retirement.
We fall somewhere between mid-end and high-end saving spectrum, a total of $425,000 saved between a 401k and Roth IRA at age 37. Am able to max out both a 401k with a 6% company match and max out a Roth IRA. Was a little late to start completely maxing out the company 401k but better late than never.
There are 10 years left on our home mortgage, we took a 15 year loan out 5 years ago when rates came way down. Once the loan is paid off we plan on using the $$$ that was going into the loan to either diversify into real estate or put it in the stock market.
Would like to retire by 55 but we’ll see how the economy is doing by then and the biggest unknown . . . health insurance since it will be 10 years (as of now) until Medicare kicks in.
is there any value in using some of these smart phone apps the help you manage you personal finances like Bill karma or money clarity?
Based on your illustration table, I am years behind in savings. I just turned 47 and my wife and I only have a little over $600,000 saved for retirement. I have a pension from work which will pay out a little over $1,000 a month. We have a health savings account with $50,000 in it. We would have more but we used $160,000 to purchase our home in San Francisco 14 years ago. We also spent another $50,000 to pay off my wife’s tuition in full. The house has appreciated in value nicely though. The homes in our neighborhood sell for $500,000 more than we paid for it back in 2003. We also sent our two children to pre-school and private school K-8. That cost us another $200,000. We also have $50,000 in each of their 529 plans. We are currently about $200,000 behind in savings. we no longer have to pay for private school as the kids are now attending public high school. We will try to divert the funds towards retirement now. We live frugally and rarely eat out. It is expensive living in the Bay Area where everybody around us seems to be wealthy millionaires. We are just struggling to get by.
OK, over parts of the last 3 days I have read 843 comments spanning 5 years on this thread. My takeaways are as follows:
– The charts are guides, meant to be aspirational and something to shoot for if you want to be financially independent at a reasonably young to middle age. They are not absolutes and cannot determine utter success or failure but will get you where you want to be if you get to work on it and stay committed AND be willing to make changes along the way that support your end goals
– You have to ask yourself a couple of hard questions. #1 Do you want to be financially independent at some point in your life? Most people say, “yes.” #2 Are you willing to do whatever it takes to achieve FI? “Hmm, let me get back to you on that.”
– I’m 60, financially independent and pretty much seen it all. I think becoming FI requires a lot of things but I will give you my “Top 10” of the big ones from my experiences. To achieve FI:
#1 You need to make hard decisions that will have you doing things you don’t want to do
#2 You need to take risks that you don’t really want to take
#3 You need to do jobs that you don’t really want to do
#4 You need to move to locations where you really don’t want to live
#5 Regarding #2, you need to plan to lose a lot of money from things that go wrong because nobody bats a thousand
#6 You better have a thick skin because everyone is going to be a critic about your plans
#7 You better get used to sucking up to people you can’t stand to be around
#8 You better plan to work harder than you ever planned to work
#9 You better be ready to give up things for today in order to afford things for tomorrow
#10. You better wait to find the right partner who shares your values, dreams, goals, and plans for the future and once you find them, never let them go!
And, you better keep reading sites like this that offer great insights from someone else who made it as well. Don’t get so hung up on the numbers and the final destination. Focus on the journey and the steps successful people have taken to get there. Try and emulate what you can and keep striving to get to the ones that seem out of reach. You are going to have to be adaptable, courageous, creative, resilient, less judgmental, more accommodating, tenacious, resourceful, refuse to lose and never give in to fear or let anyone else steal your joy. You really can do whatever you set your mind to do if you really want it bad enough.
So I ask again, “Are you really willing to do whatever it takes to achieve FI?”
Excellent points! Couldn’t agree more.
When many older folk started, 401K contributions were nowhere near $18K. Assuming no matching, taking the maximum allowed contribution for every year back to 1986, the year I started working as an engineer, and apply the S&P 500’s returns you would have about $1.9M. This is about the same as a 10% compounded return.
For example, in 1986 the maximum contribution was $7000, my starting salary was $27,300. The company placed limits on 401K contributions at the time to 15% of salary.
All youngsters just starting should strive to save while finding an appropriate life balance and become financially independent as quickly as possible. These are good examples of where a savings minded individual can endup. The numbers are, unfortunately, not as good of a representation for the already retired as to what they should/could have in 401Ks if they maxed out and saved.
Great post – I keep living #5 but I also have #10 lol – you are a wise man!
What do you have to say for people that either do not have access to a 401(k) through their employer or have gone through periods of unemployment?
I have the target savings overall suggested for my age when I include savings in the bank and other investments such as IRAs, but not in my 401(k).
I lost my job at the beginning of the year, and worked temp jobs for 3 months (no 401(k) opportunity), in my present job I had to wait 3 months to be able to participate. What did I do? I put money in the bank and utilized other investment sources such as maxing out my IRA contributions. I think that should count. Particularly if you don’t have access to a 401(k) to contribute.
Any chance you can share a bit more about the assumptions used for the “High End” table? I’m struggling to understand how you can get from $18,000 in Y1 to $50,000 in Y2 and $100,000 in Y3 when the maximum contribution an individual can make is $18,000. This either assumes a very high rate of return, or a very high company match absolute amount (driven by a high salary assumption or high % match assumption).
The assumptions are aggressive. Every year you can contribute $55,000 in total 401K contributions if you include $18,500 for employee + $36,500 from employer starting in 2018. Given we are also in a bull market of 10-20% returns, that’s how you can get there.
A lot depends on your own contribution, but also the generosity of your employer and its profitability as well.
I would use the middle column as a more realistic and achievable guide.
There are a handful of employers that allow you to contribute pre-tax up to $18.5k and then post-tax up to the $55k (total combined contributions, employee/employer).
I benefited from a program like that before retiring at age 55.
Times are changing – I was at an employer that did a 6% match, then they limited the pension (about 30% of my last year gross salary), and jumped it to 10% match. They later told new hires – 3% match and no pension. I changed employers and first yr – no match – now 4 yrs of 1.5% match, then it will go to 4%. A very small pension which will end up being a lump sum for me. My point is that pensions are going away, and unless you are landing excellent jobs (which Agile teams in IT will not even have), become a contractor? … you will not find a lot of 6% + matches unless you are in a very high paying Job. Maybe this is in reference to the perks of executives – once you get to Dir/VP – then yes, lots of perks $250K plus jobs etc – but those are not obtained by a high percent of people – maybe the top 5-10%? And of course life happens – if the family needs you – you help to a reasonable extent, without hurting your self too much. Maybe they even pay you back. So I am still on the point of – how to I maximize returns on what I have? Please feel free to comment. I can’t do it on 4% per year – even at 7% I want more – yes if you hear greed and fear in my writing – yes I feel both. I want to figure out how to get the right info at the right time to capitalize on much more than CD rates.
I’m glad I read this. Unfortunately I’m doing horrible in this area but plan on changing all this. Are you ever available for consultation? or can you recommend a place that can help advise on how to maximize investments?
This proves to me that I am WAY behind the average, however, I have a few deals going on which I believe will put me in the fast lane once they ‘click’ and come good.
Thanks for this post. It really lit a fire under my butt and reminded me I am behind the curve and need to work harder.
Well, it’s been a few months since I wrote my long post up top. I’ve since put 25% of my 401K into the brokerage firm linked to my 401K (Charles Schwab). I used to trade stocks, so I’m pretty confident with my skills. I can read stock charts within seconds and tell you what exactly the stock price will do. It’s been 2 months since I’ve been trading stocks and I’m up 90% (i.e. almost doubled my money). In other words, the 25% of my 401K I moved to the trading account is now almost half my 401K. With discipline I plan on doing 1,000%+ returns a year.
Again, this requires knowledge, skills, balls, heart, no fear, no stupidity, experience, and superb chart reading skills. I’ll be able to make a million in my 401K soon at this rate.
In fact, I’ve gotten so good I lowered my 401K from 18% back to 7% to get all the match. I’ll be switching over to the Roth 401K method so I can make a shitload of money from trading it and never ever have to pay taxes again. Life is great when you know what you’re doing.
Well I hope you are right.
I have found it is not wise to mix up “intelligence” and “bull market”.
Good luck to you.
Please look at the chart of WMT today and tell me how you could have through technical analysis predicted a 12% drop in 2 days
This is a joke right, jonny? You said your approach requires “no stupidity, experience” except your post was dripping with tons of the first and none of the second.
How are those 1000% returns working out for you?
I spoke to my auto/life insurance agent two days ago. He was astonished that I have $250,000 in my 401k at 36 years old. My net worth isn’t much higher, maybe $310,000. Anyway, he tells me that many of his clients are in their 40s and 50s and have far less saved and are rather clueless . They drive expensive cars they have no business owning. This was in Scottsdale, AZ , of all places, a generally wealthy city. I am finding it very difficult to be sanguine about the misbegotten myopic lifestyle most of the population in this country lives. I see it all the time at the grocery store, people paying $2 for a soda when they have $87 in their checking account, or another example, openly admitting to exploiting taxpayer funded programs such as WIC and EBT. The financial Samurai is right in most of what he writes but the advice is unheeded, unknown by the masses.
I went to college in East Phoenix. I didn’t know anybody when I arrived. I remember standing in front of the ‘housing’ bulletin board, randomly connecting with two other guys and we explored getting a place together. One of them said, “I don’t care about the details as long as it’s a Scottsdale address.” I realized I needed to cut them loose and go out on my own. That little nugget convinced me that while there is certainly real wealth in Scottsdale, there’s also a lot of posers, just barely treading water.
Pretty interesting article throughout. Have you considered recalculating the table with real amounts, as opposed to nominal amounts? This would be useful for individuals since it would compensate for the increased costs of living. Also, do you really believe 7%+ nominal growth in your 401k portfolio is attainable over the next 10 years? If you asked me in 2010-2011, I would have agreed completely–these days, not so much.
Hmm. I find the numbers a bit interesting for someone who is say, 44. And someone who is say, 47.
For a 44 year old (under 45 – mid-end), must have saved around $800K
But for a 47 year old (over 45 – low-end), must have saved around $500K.
The Math is not that simple.
Someone over 45 certainly went through the 2000, and 2008 cycles.
But its not making sense for borderline ages, like ours :-)
This article concerns me. Write off 401ks like you do social security? SS is confiscated – exorted, and unless you are a religious worker there’s really no getting out of it. 401ks is entirely voluntary (now at least). If you think it will be confiscated, why are you telling people to max it out? This seems irresponsible. I fully expect this as well – government will a large chunk of it either directly via taxation and fees or indirectly by mandating US bond purchase with the funds. I’m only contributing enough to get my employer match, not a dime more. Even if it is taken, almost half of it was funded by my employer so I may still come out ahead. Take as much of your paycheck as you can now, I say. Tax rates are historically low. I’d rather take a 28% hit on that money now than who knows…40% or more later.
Just my .02
I think the government will indirectly confiscate 401k accounts for the , quote, “greater good” as well. I just do the match as well. But I also feel that if the government ever does make private 401k accounts public, then all bets are off.
Hello
I am trying to figure out when enough is enough so to speak. I am 53 and hate my career. I work for the government and this is something else to be brief and blunt. I don’t want to “run-out” when I am 70 and need to go back to work…so to speak. In reading many articles on this, I have come to realize there are many people afraid of not working …
My stats are as follows:
I have a retirement/pension/annuity income of 7500 monthly after taxes. My healthcare is part of the pension package as well. My 401k has rough 70K from my second career and I have around 650K in a brokerage account as well. My home is paid off; I have very little debt and I have something like 50K in savings.
I still save and my government paycheck is in automatic mode to the 401K or the brokerage account. I realize and am grateful for everything. At what point to say that is enough-time to chill. I can easily blow money with dream type events of travel or whatnot…and do not want to have to resort to frugal. Some of the graphs I have seen state the saving quotient should be at 6 or 7 digits when quitting working. No graph accounts for a defined benefit plans value insert-able into the logic.
There is never enough until you say it’s enough. Please read: Overcoming The “One More Year Syndrome” To Do Something New
Sounds like you’re doing pretty well. Is that $7,500 in pension “now”, at 53, or do you have to wait till 55? If your monthly expenses now are below $7,500, I’d say you’ve arrived. Your $700K plus in your other accounts is your cushion.
I’m 53 and only have $192,000 in my 401K. I do have a pension that will pay about 1500 a month, and my SS will pay about 1500 a month. I want to retire at 62 and won’t have any debt. My house will be paid off, so I feel like I have enough for retirement.
I think you’ll be fine as well depending on your spending habits. Check out this post: https://www.financialsamurai.com/how-do-i-calculate-the-value-of-my-pension/
The big unknown is how much health care will cost me.
It will cost you about $550 – $700/month per person for a gold to platinum plan. I’ve done tons of research on it because I’ve had to get my own as an early retiree since 2012.
Sam
What are your thoughts on long term care?
My thought is to leave a legacy to my kids.
Rob
“Meanwhile, you have to make less than $133,000 a year as a single or $196,000 as a married couple in 2017 for the privilege of contributing $5,500 in after- tax dollars to a Roth IRA, which I do not recommend before maxing out your 401k.”
I disagree with this. Again, I created a super duper tool that confirms 100% that if you max out your 401K (assuming it’s a traditional 401K, max rate at 30% with 50% company matching up to 7% or so), when you turn 70 1/2+, the IRS will eat your heart out. If you have a large 401K balance (we’re talking millions, which IS how you become a millionaire by contributing this much), you will be forced to withdraw hundreds of thousands and even a million dollars plus!!! That’s a REALLY big tax bill! Trust me, I’ve done the math and have a tool that tells me exact amounts.
For example:
Joe Schmoe is 25 years old and makes $15 an hour. He gets a 3% annual salary raise each year. He contributes 20% into his 401K at age 25, with company matching 50% up to 7% of his wage. At 8% rate of return, at age 62 when he retires (yes he can retire much earlier too BTW, which is one of the beauties of contributing more, earlier), he’ll have:
62 years old: $2.39 million
65 years old: $2.77 million
70 years old: $3.63 million
80 years old: $5.12 million
This is all while distributing about 70% of his pre-retirement earnings + social security. Since Joe no longer needs to save for retirement, he can live on less than what experts recommend (75-85%).
However, at age 71 1/2+, he gets hit. Instead of taking out $80K, he is forced to withdraw $136K. This number only goes up. At 90, he has a balance of $5.64 million, and is forced to withdraw $498,311! And it only goes higher…
All the while, Joe Schmoe also saved the max into a Roth IRA. At 90, his Roth IRA (8% returns so far), it’s worth $2.85 million.
If Joe Schmoe has been smart and put a little more than half into a Roth 401K (just to get his company match on the traditional 401K), he would have transferred $1.25 million at age 62 to his Roth IRA, leaving only $1.02 million left in his traditional 401K. This continues to be drawn in retirement, and never triggers the IRS Required Minimum Distributions, and last him until age 98.
All the while, the transferred money to his Roth IRA now grows to $14.5 million at age 90, tax free (8%), and $25.31 million at age 98!!!!!!!!!!!!!!!!!!!!!!111!!!!11!!!!!!!!!!!!!!!!!!!!!1 This can then be transferred to his kids/family/whomever as a trust.
A lot of peeps think (and rightly so since they don’t have a big nest egg) they need to move their retirement funds into bonds as they approach retirement age. Not me. I’m prepared, so I’m going to keep it on Vanguard’s index fund that costs only 0.04% !!!! Heck yeah baby.
You’re all welcome. And if anyone is interested, I can share my tool. Donations are welcome.
Here are other examples I calculated:
Example #1: You start working at age 24, making $13.90/hr ($29K) and retire at age 67, making $100K. You contributed 15% to 401K and $3K a year into a Roth IRA. At retirement, experts suggest 75-85% of your pre-retirement income to retain your financial lifestyle. However, you can live on 63% + SS ($79K total, equivalent to $100K with 15% into 401K and $3K into a Roth IRA) because you no longer need to save for retirement. At a 6% rate of return (RoR) before age 55 (3% after age 55), at retirement, your balance grows to $1.62 million. The funds last until age 95, all while receiving a comfortable income at or above the Median Household Income level.
If you invest in higher risk/above return funds after age 55 and see 8% RoR, you’d have $2.76 million at retirement, $3.5 million at age 70, $5.6 million at 80 etc. In fact, the 401K balance would grow so large that IRS Required Minimum Distributions (RMDs) triggers! You’d be forced to withdraw an extra $6 million+ over four decades, on top of any income you normally would be receiving. But that’s a not entirely a bad thing because that’s extra cash on top of the millions already in the Roth IRA! And, until age 113 (at 8% RoR) all income comes from 401K funds, leaving the tax-free Roth IRA to grow (for inheritance)!
Example #2: Same scenario, except you only contributed 3% to 401K. At retirement, your 401K balance grows to $290,818. Additionally, because you never saved a lot, to retain your financial lifestyle, you need 81% (instead of 63%) of pre-retirement earnings + SS to make $97K total. Not doing so, you’d experience an “income shock” if you lost $14,000 income a year. To add insult, your 401K only lasts until age 70! If you live past this age, you have nothing but SS. When you die, your children inherits nothing. Even at 63% pre-retirement earnings, all your 401K runs out at age 71!
Even at an 8% RoR (after age 55), funds run out at age 74 (81% = $97K income) or age 77 (63% = $79K income)!
Example #3: Same scenario, except you contribute ZERO into retirement accounts. Anyone want to guess what happens? (And yes, I know people in their 50s who are in this same boat and all they can say is “I can’t afford to put it into 401K”. You see the problem?)
So… after those short examples, what I would be doing is this below. My only regret is no one told me this when I was younger!!!! I’m almost 40 and have very little in my accounts. However, if I max out everything, I should have about $2.6 million at age 62.
1. Max out 401K until company matching has fully been realized.
2. Max out a Roth IRA.
3. If your employer offers a Roth 401K as well, max this one out. This one can convert to a Roth IRA with minimal complications or tax consequences. This one is subject to required minimum distributions too, however, it is tax free. Yet, you do NOT want to have to withdraw from it since it grows tax free!!!!
4. Once company matching, Roth IRA, and Roth 401K are maxed, then max out regular 401K, in that order.
The Roth 401K can be transferred to your children TAX FREE!!!!!!!!!!!!!!!!!!!! There’s no probate when you die. The other retirement tools, not so much.
Good luck all!
Whew! That’s a lot of info!
One thing I didn’t see in there: if a traditional 401k allows post-tax contributions (a fair number of larger companies did this before “Roth 401k” became a thing), then those post-tax contributions can be rolled to a Roth IRA. This is what I have done.
This is great. I just found you…
I am 50, earn about $125k… My wife passed away just over a year ago (cancer) and I am just beginnig to get my legs back under me. We had some serious financial challenges about 10 years ago – business partner embezzled everything…, and between that and the cancer here is where I am at… $180k in a taxable brokerage account. I am very aggressive with it an up over 30% ytd. I have only 60k in my 401k, and add about $1500 monthly – again aggressive with that as well. I am also looking for additional income streams and will certainly make that happen. I have 3 teenage daughters as well and am teaching them all that I wish I knew back then… I have a great job which I love at a major airline, so I have the ability to travel essentially for free. I also lifetime benefits on another major airline, where I “retired” at 39 – and a small pension of about $1k monthly that I will draw after 70 more than likely. I have a great mortgage, 2.8% locked for 15 years, and about $150k in equity currently.
I purchased a 30 year term $1M life insurance policy at 40 that costs me $100 per month. That is in addition to a another $1.5M in employer based life insurance, so the girls are covered.
I agree with then need to have the abundance mentality. I am convinced that the entire world is out to help me. I clearly have a lot of work to do, based on some of your numbers above… Lol.
I have come back to this post multiple times as a “check” on where my family is. It is inspiring and a little daunting. After four years active duty, I matriculated to law school, graduated and started working (hard) at a small law firm. I was 26. I am now 37. My wife is 5 years older and has out earned me year-over-year. For 11 years, I have maxed out every retirement vehicle available, prepared four our two kids college, and disciplined myself to contribute additional funds to a taxable investment account. Here is the result for us:
1. Retirement Account – $691,787;
2. Taxable Account – $362,000;
3. Kids 529 (ages 5 and 3) – $60,000.
Outstanding! That’s how it’s done.
Sure, outstanding, but the problem is we all can’t be lawyers. Some of us are lowly scientists who don’t make that much. Not everyone makes 6 figures to make these unrealistic goals set forth by the author.. I can’t live with my parents or I would have been jobless, as they live in a rural area, so guess what no jobs for me. All this forum is is a bragging ground for a bunch of over paid CS majors anyway. Most of the info here is completely useless to the average person who worked their own way through college and life.
All I would say is that the attitudes and methods encouraged by this site apply to everybody. If you make 50K and live within your means, your expectations and expense needs are smaller in retirement. So you don’t have to save $5 million to retire, but you have to save. If you save just $5,000 a year on a $50,000 salary from ages 25 to 35, then manage $7,500 on a $75,000 salary from age 35 to 65, your 401k at 6% rate of return will be $971,455. A 4% draw from that will be $38,858. (You could probably take 5% out and make it $48,572. Or use a 7% rate of return and you’ll have $1,234,328, of which 4% every year is $49,373 — and that probably leaves $1.2M to your patient wife when you succumb!) Given that you have been living modestly, that $40,000 or $50,000 in income would be awesome. This example assumes you did no other savings and your income /savings never increased in the last thirty years of work, which it normally would. The point is that these methods are all scalable. Cut it in half, and the halved figures would be just as big in relation to the spending and income expectations of the saver.
The examples are more fun if you add a zero at the end, but
Scalable, really. Of course it is, except that the title says what you SHOULD have, not what you can scale up to. Problem is you are not even counting cost of living. Do you think scientific researchers work in low cost of living areas in the boonies? Wake up.
My point was that the low end of savings in his charts is achievable even if income never hits “six figures.” I don’t know where you live, but assuming you are living in a high cost of living area on that salary, then you’re probably good at living frugally. Your spending in retirement will be consistent with your past — again, all scaled to your experience and income/expense patterns from your working years. Meaning not that you need find a way to scale up to gigantic absolute savings, but that the methods here are equally valid if you divide everything by 2 or 4 or 10.
I would also say that when you retire, you can leave the high cost of living and move to the “boonies.” That’s what I want to do. It will make my savings go all the farther, especially on housing costs.
We should all be pessimistic about retirement scenarios, but it’s no reason to be negative! I find it calming to run through scenarios and planning options in my mind: it gives me the illusion of some control over a process with lots of randomness and unpredictability in it!
Timeless post! Shared multiple times with more junior folks I mentor. Although I’d add that what one ultimately have saved up for retirement should be dictate not only by age, years worked or income level but a combination of all three. I use the below to estimate where I want mine to be at the minimum and make appropriate changes to contributions when I go under.
retirement savings = [1/10]*[years worked]*[log(age)]*[annual income]
Is that net or gross for annual income?
1 / 10 * 13 * 31 * 90000 = 3,627,000 needed for retirement?
log(31)= 1.49
What are your thoughts on a Roth 401k?
My company offers both a pre-tax 401k plan and roth 401k plan. Company match of 4% on 5% contribution ($1 for $1 on first 3%, $0.50 for $1 on next 2%). Both cap at $18,000. I’m 26 and make $65K. Should I still go pre-tax?
I think it makes sense to always go Roth 401k and Roth IRA — If you even consider the tables above, by the time you are 65 a lot of what is in your 401K and Roth IRA is going to be growth as opposed to your contributions. You could be in a higher tax bracket in retirement, or taxes could be even higher in general. Would you want to pay taxes on all that money?? I hope not. :)
Cheers.
Found you listed at Rock Star Finance as one of the best personal finance blogs. I needed this info and know my readers will appreciate it too, great job!
Hello Sam,
I want to let you know that i follow a lot of your blogs and that you sound like a very successful investor. I am 34 years old and follow your graph very closely. It gives me a great understanding where i need to be at in my age group. It looks like i fall under the “Middle Age Savers Or Mid End” column and it looks like I’m doing okay but, i can always do better.
I live in the Midwest and always finding ways to improve my nest egg. I currently max out my 401k every year and I don’t like to invest in CD’s (Short Term Investments) or any low ROI investments as it does make sense for me. I looked at Crowdfunding as a side investment but, I haven’t heard too reviews around it and haven’t tried it as of yet. Also, i looked into Flipping houses on the side but, where I can live it is very high risk. what else can i invest in that will help me overall? Let me know your thoughts. Looking to be Financial Free here. Thanks.
Instead of flipping houses, I’d be much more surgical and invest smaller amounts of capital is properly vetted deals via real estate crowdsourcing. RealtyShares is my favorite real estate crowdsourcing platform after meeting with senior management and spending over 20 hours researching their company and investing $35,000 so far in two deals (Conshi PA commercial property and Austin, TX multi-residential property). Check out their platform for free and peruse around. Doesn’t hurt to look.
Also, please read my latest investment trend post: Why I’m Investing In The Heartland Of America
End of year mess up!heeeeeeeelp :(
Situation:
Me: W2 gig=91k salary Contributed 6% to 401K
Wife: $30,000 salary NO 401k
New Scorp started 2016: Net 70K no salary taken….
What should I do? I tried to max out my w2 jobs 401k but didnt realize you need to be doing it only through payroll the company we have 401k through wont accept a check….
I met with financial advisor and they recomend paying wife on scorp and starting a 401k but they want $900 setup and $1,200 annual “analysis” fee.
Are there any websites I can manage my own or start my own? Should I do a separate 401k for wife through biz?
I would imagine that both E-Trade and Vanguard has lower 401k setup fees than what the advisor will offer. Does your wife work in the S-corp?
She wasn’t paid as a W2 but I can pay her still in 2016 if it makes sense….
Do both you and your wife have two jobs?
You: W2 job; S-corp but no salary in 2016
Wife: S-corp with no salary but a $30k distribution?
If I qualify by AGI standards can I do a regular IRA and defer 11k combined?
Sam, do you have any recommendations if my employer does not offer a 401k at all? I’ve been squirreling money away in taxable accounts and maxing out Roth IRA the last 3 years. I’m 30 years old and make about 80k a year up from 45k when I started working at 25. I have about 17k in Roth and 100k in taxable accounts.
I can see where some readers are coming from about not being able to save up to the 18k limits each year. I just recently graduated and started fulltime and will only be sending 6% of my 62k salary for these first few years. Why? Due to my first real estate purchase at age 19 I am paying 1k each month for a mortgage, another 2k for utilities and other items (believe me I have looking at trying to cut costs but there is not much wiggle room). I currently rent out a room in my home to ease my expenses by $500. I see myself at age 22 ahead of what some of my peers are. Of course it seems like many have had an easier route as I did not receive any funds from my parents to pay off student loans or have any assistance buying any of the property I know own. Now dont get me wrong having the assistance of your parents is wonderful. I just dont believe that they should spend their hard earned money due to my life decisions such as going college and needing a vehicle and place to live 2+ hours away from any family, they have paid enough of my expenses when I was growing up. So I can see how it can be difficult to save the max contribution to a 401k. I have been attempting to find some ways to earn a few extra side hustling but that is still a work in progress. Maybe once I establish myself a bit more I will be able to adjust that % of contribution, currently I have it rising each year by 2%. However with the current employer they match 6% and offer a pension (which is getting incredibly hard to find these days). So again, paying for a house, purchasing my own vehicle, and paying my way through college I feel like I am still in solid standing to retire fairly well in some odd 40 some years away. But if I were to save like you suggest I would be put in a difficult situation as Maslow’s hierarchy would beg to differ where my money should go. Just my two cents. Enjoy the blog long time reader first time poster!
What an impressive start, Brandon. Congratulations.
Smart, ambitious, and pragmatic.
I’m 36 and have about $275K in my 401K. I live in San Diego. I own a condo that I reside in and a condo I rent out. I went to an inexpensive school and worked full time. When I graduated college, my starting salary was $29K/year. I worked very hard throughout the years and currently make a salary of $160K/year. I obtained an MBA (again at an inexpensive state school), got my CPA license, became a real estate agent, and am certified in contract management. I did not contribute the max amount to my 401K in the first couple years of working, but contributed the max for the next 8 years. The last 4 years I have only contributed $10K to my 401K because I am considered a highly compensated employee, and not enough other employees at my company contribute. I also contribute the max to an IRA each year (I started this 2 years ago). I have lived on my own for much of my life, only recently to have moved in with my long term boyfriend. I have purchased 2 cars since I was 20 years old; both Honda Civics. I save about 35% of my after tax income. I take vacations twice a year on average, I eat out a few times a week (I am definite a foodie…I am actually starting a blog on this), and I enjoy my life thoroughly. In about 2 years I will have saved enough to purchase another rental property (its CA, it takes a while to save for 25% down), and 2-4 years after that, another. Yes I have lived frugally, and could probably have taken more extravagant vacations and owned tons of expensive “stuff”, but I also plan to retire at 50-55. I am not missing out on life at all, its all about balance. I think these goals are very attainable, it just takes discipline.
Great job Danielle! I look forward to checking out your blog too.
Good luck with living with your BF! Make sure you helps out equally around the house. If not, kick his ass.
One of the best ways to build passive income is to simply buy your home, ENJOY IT, and then rent it out after you’ve saved up enough to buy another awesome home. In your lifetime, you can do this 2-3 times if disciplined and be set for life.
Related:
Buy Property For Lifestyle First, Income Second, Capital Appreciation Third
How To Start A Profitable Blog To Make All Your Dreams Come True
Best,
Sam
I posted in early 2014 (age 42) with a balance of near 300k. As of today I’m nearing $355k +/- 5k and that includes my after tax. Maxing out is best thing you can do. Consider the tax break. Not being taxed on that extra $16k-$18k really makes a difference.
I always come back to this page to read the comments.
Sorry, but the OP is living in a fantasy land. These numbers are unrealistic for the vast majority of Americans, and seem to be based on the inflated salaries of the Pacific Northwest/California/Northeast. I live in Florida, and let me tell you– no recent college graduate is going to be able to afford to deposit $8,000 into their 401k the first year unless they’re living at home and having their parents pay their expenses. Hell, I’m 31 with an economics degree and I only have a little south of $17,000 in my 401k. Why? Because I had to pay for things like student loans, rent, food, gas, utilities, a car loan, etc.– you know, things that I need to survive on a daily basis. This is not just poor financial advice; it’s dangerous advice, because it leads people to believe they’re “doing something wrong” and/or would lead them to live like paupers in order to meet some ridiculous goal.
Oh, and I’m calling BS on some of these people with their inflated 401k amounts. $150k in your 401k account at 25? Yeah, right LOL.
Brandon,
Always good to have readers coming back. Let me ask you:
* Are you working over time? If not, have you found a side gig to make extra money? Read: Spoiled Or Clueless? Try Working A Minimum Wage Job As An Adult and What’s It Like Driving For Uber?
* Have you considered starting something online, where there are 3 billion+ people to potentially connect with? Companies have leveraged the internet to boost profits, why don’t individuals do the same thing given it’s so cheap and easy to start nowadays thanks to technology? Check out: How Much Can You Really Make Blogging? and How To Start A Profitable Blog Today
* Have you tried getting up a couple hours before your colleagues and peers to get some extra hustle in? If you work an extra 1-2 hours a day on your side project, you will have committed 365 – 740 hours of time to your project. I am sure you can create something meaningful that throws off extra income if you stick to it.
* Have you worked on developing an abundance mentality instead of a scarcity mentality? For the longest time, I had a scarcity mentality about leveraging Facebook to promote this site. I finally realized how foolish I was six years later and finally started my own FB page.
* Have you spent some time reading other posts on Financial Samurai from people who were able to make more money at a young age? Here’s one: How To Earn Six Figures By Age 21
* Did you read up on the various investment strategies for retirement based on modern portfolio theory? Understanding these concepts should help motivate you to contribute more to your 401k and invest in after tax vehicles like Wealthfront where you can just investment automatically.
The final article you should check out is this: The Inflation Interest Rate Paradox: Why You Must Continuously Invest. Because although having $17,000 in your 401K at 31 is not that great, it’s really going to be bad if you’re 41, getting tired of work, want to take things down a notch, and have to take care of your family and friends, and still don’t have anywhere close to what I recommend for a 41 yo.
This is when life becomes miserable and you start really hating everyone and the world because there is so much angst and fear about your finances. It is worth the “sacrifice” to save more aggressively and to work extra hours when you are younger, so you can have OPTIONS and more freedom when you are older. Don’t wait until it’s too late because there is no reverse button in life.
Sam
Even if you are under the amount of 8k a year in a 401k, anything helps and gets the advantage of compound interest. That’s the part that most people don’t get. Take $2000 a year and keep investing it over 35 years, you wind up with 250k at 6% interest. That’s $5 a day, which is still a lot when money is tight..but not insurmountable. If you earn more, you put in more. Pretty soon you have a 500k+ nest egg that at least puts a buffer between you and the social security minimum. If you did 8k a year and had 6% growth, over 35 years you have a million dollar balance. The money you put up front is the most important. It’s what has time to earn the interest. waiting till you are 40 to 50 and then putting loads of cash into it, doesn’t give you nearly the growth as modest initial investments.
Where does pension contributions factor in? For example, if a married couple is contributing 2K per month to a pension, wouldn’t 18K X 2 to a 401K be a little overkill (5K per month)? I mean, shouldn’t the pension contribution be viewed the same as contributing to a 401K?
I am looking at :
9,000-SS a year at 63
66,000 pension a year (80 percent ) projected in 4 years
wife will still be working
when we both are retired we are looking at :
SS-24,000
80,000 pension
4 percent of 401 K’s 28,000 projected
Total-132,000 about 85 percent of projected salaries
DINK’s plan on traveling and donating to charities and people.
I wished I started saving earlier but life got in way, don’t make much in the military , we should be Ok, I know how to stretch a buck, best thing I ever did at 50 was join AARP savings for members are outstanding well worth it. From, travel, to shopping, to groceries, tech items, gift cards, and dining…Goos Luck everyone, we are all in this together…..
Given you’ve got a pension, you guys are sitting pretty!
See: How Do I Calculate The Value Of My Pension?
Yes state pension I am grateful but work hard, Also I pay into that pension It is lost on a lot of anti pension people that the first couple of years receiving the pension is money I contributed…
42 yo. Have 20k in 401k. Company matches 50% up to $2,500pa. That is all the savings I have. Guess I am too way behind to go anywhere close to where everyone is.
One thing though…instead of struggling and scrimping and saving I have lived my life. Drove fancy cars, taken expensive vacations…done everything that tickles my fancy. Consider this, if you pass away at 50, all you have done is save and never enjoyed life! After 65 you can still no longer anyway enjoy life (both in terms of health and also for an item that is $100 today you will be needing to pay $1000 then). People investing in 401k and retirement will never live…save till you get older so that you can live happily and when you are older you just have enough to go by and too old to enjoy. Saddest part of humanity and the way we have setup things for ourselves and our future generations.
I love how you’re living on the edge with only $20K in your 401k at 42! What other savings and after-tax investments do you have if any? How about owning your own house etc?
I’m 39 now and have been gradually spending more of my money to live it up. I agree. Life is short! Check out:
Enjoy The House’s Money: Practice Taking Profits To Pay For A Better Life – I don’t have the courage to spend like you. But I have found it easier to spend my profits on investments I made years ago.
Why Start A Business? To Live It Up! – Here’s another strategy where one can start a lifestyle business to help pay for all the fun things you like to do. In my case, I love to travel, so I’m starting a Travel business on Financial Samurai.
counter-points:
– consider this: living way past 50. How much working do you plan to do?
– easy to spot people enjoying life at 65, and way beyond
– in your example, that $100 item would become $200, not $1,000
– saving in 401k has not prevented me from ‘living happily’
I should have stayed in the military.
Married. Just hit 33 years old. 2 kids (5 and 3). Wife is stay at home mom. $100K in 401K. IRAs totaling $25Kish. Salary is $100K pre tax. Paying mortgage on the house. $20K credit card debt. Student loan free. Lease a car $350/mo. Own a car out right. Contributing 14% + 6% match.
This would suggest I’m behind according to the chart. Not sure if I agree considering all other circumstances. Thoughts?
Hi FS,
Just started reading your blog and I imagine that I will read all posts within a month or 2. Started on Mr MM, JL Collins & Jacob EER a few years ago and it really got me on track, after making a bunch of big mistakes. I would like your opinion on something. Quick background 1st – I am 59, have about 130k saved in 457b. I was saving the $24k max, but just switched to the special catchup which will enable me to save $36k/year. I only make 70k gross so it will be tough, but I have a side gig which enables me to do it. I plan to retire at 62. I am lucky enough to have a pension which will pay me about 2k/mo at age 62, which should cover my bills. I figure my side gig will easily cover everything else, but….if I scale back my side gig, I would either start drawing SS or draw from 457. At 62, I would draw about 1300/mo SS. I figure my 457 would be maybe 200k at 62 yrs, x 4% WD = about $650/mo possibly. My question is about whether it would be better to delay SS or better to take SS early and leave 457 money invested (I would roll over to an IRA and maybe start Roth conversion). It would seem that delaying SS would be better, as I gain about $250 per month each year I delay, so $250 x 12 mos = $3000 per year. $3000/ 4% WD rate = $75,000 saved equivalent, which is pretty unlikely with my 457/IRA. How do these figures look? Thanks.
I came to the US about 6 years ago when I was 35′ and brought roughly $130k over from my home country. I worked for 2 years making about $130k a year. Bought an apartment in NYC in 2010 then lost my Job. Rented out my apt on Airbnb and lived with a friend, then got a job later in 2012 paying $190k. I’ve lived frugally deferring most of my income, and saving as much of what’s left over. I’ve now got $130k in 401k, $170k in brokerage accounts, $100k cash and about $400k equity in my apartment. My deferred income account is now $188k but of course I will have to pay tax on that. I’ve got about $1.5m in assets in my home country. All I did was buy properties, live frugally and invest semi wisely. I’ve never had an amazing job, I’m just a computer engineer.
Sam,
I sent this chart to my friend because she is 38 and only has $20k in her 401(k)…i have been telling her for years that she needs to increase her contribution and it has gone on deaf ears…
hopefully this scares her a bit to save more…
I know people like that and it scares me to think what will happen to them when they get to 55 and no one wants to employ them. I’m making the assumption that someone who is 38 and has only saved 20k isn’t a nigh flyer. I’m certainly not and I’m very confident I will be unemployable at 55. Who wants an old computer engineer?
Young people always assume they will move upwards in an organisation and continue to make money as fast as they experience it now. In reality corporate structure is a pyramid and it gets harder and harder to get into more senior positions. The initial fast wage growth and promotions soon lose momentum. I used to get promoted every year, now it’s not happened for 6.
Quick question: If we should write-off our 401ks completely from our mind and not expect them to be there for us when we retire, should we consider other vehicles instead of maxing out? I’m 29 years old and currently maxing out, but if someone told me the withdrawal age would be 80 or higher in the future, wouldn’t that be cause to rethink things? Potentially scale back and only contribute enough to receive my company 401k match? All feedback welcome! Thank you!
You should always diversify… All savings spread out over tax free and Roth IRA and your own brokerage account, cash, etc. heck even buy a lottery ticket sometimes.
I don’t think 401k’s will disappear and retirement age will be pushed much past what it is – that just won’t happen. I don’t think social security will be gone either – modified, but not gone.
If all that happens and the cash we placed into 401k’s is penalized for being taken out before age 80 or some crazy number much past 70 – I would take it all out ( delay paying taxes on it) and move to a third world country with decent cost of living and free health care and just live there and forget paying the taxes. Just take it out and go. I’ve spent a lot of time reading ex pat logs and forums and it’s the new retirement plan for many…. Live where you would vacation anyway. Thinking Southeast Asia, parts of Africa and central and South America. These people get together in communities and share expenses for food and housing. Like college living in paradise.
Think outside the box because at some point the US is just not a favorable place to live anymore if that starts happening.
Thank you, Christy! Very appreciative of your perspective. You are, of course, absolutely right about diversification. I am fortunate enough to have a nice career and am able to save ~50% after tax. Still, if I somehow manage to save $3M plus in a 401k but then cannot access it until some ridiculous age (e.g. 80), I will be extremely upset with Uncle Sam!! :)
I would always focus on maxing out your 401k to the max, even if it is beyond the company match. You will be incredibly pleased 10+ years from now when you’ve accumulated most likely a $200,000+ nut without much pain.
For your after tax money, I like the idea of contributing to a low cost digital wealth manager like Wealthfront. Make it automatic, like 401k contribution. Wealthfront automatically rebalances a portfolio tailored to your risk tolerance. The first 15K managed is free too with my link.
Finally, stay on top of all your money with Personal Capital, a free financial tool to track your net worth, x-ray your investments for excess fees, and help you plan for retirement w/ their excellent retirement calculator. I’ve used them since 2012 and it’s been awesome. In order to optimize your net worth, you must first know how all your money is allocated!
Thanks, Sam. Similar to what I mentioned to Christi above, I have been fortunate in my career and finances thus far. It simply made me wonder about things when you mentioned the 401k may not be reliable as a retirement investment, when many consider it to be the holy grail in that regard. Like I mentioned above, if I manage to save $3M+ in a 401k but then cannot access it until a very old age, I will be quite displeased!! :)
Sam –
I don’t know why you would sow FUD about the government raising 401k withdrawal age to 80.
What benefit would that be to the government? They’re licking their lips now, wanting their fair share of all those deferred taxes (i.e. RMDs at 70.5).
I’m all for diversification, but that particular scenario seems awfully unlikely.
Financial Samurai, does the $735K to $3.5K net worth goals take into consideration pensions (still available to about 30% of the populace) and social security? For a 65 year old retiring today those two streams of payment could add $1K – $5K per month to most retirees’ cash flow.
Hi Sam,
I’ve slowly taught myself how to be fiscally responsible over the last six years, and I’m in the process of ramping up my financial literacy in general (how to invest, what to invest my money in, etc.). I managed to pay off 42K in student loan debt at a public university in the last three years since I graduated. Last year, without doing any research at all, I started a life insurance policy with Midland National based on a friend’s recommendation, and have contributed $1000/mo to the policy for the last 12 months (my online account currently shows $11,200.80 as the “accumulation value”).
Based on your recommendation, it appears I should be maxing out my 401K instead of focusing on this life insurance policy. What do you advise I do here? Should I take a hit on fees, withdraw all my money from the insurance policy, and jump-start maxing my 401K? Or should I dramatically cut back on what I contribute to the insurance policy (from $1000 to $200 or something for instance), that way I can focus on contributing to both life insurance and a 401K? Please advise.
Thanks,
H.
I would keep your life insurance policy, cut back, and max out your 401k. What is your reason for aggressively contributing to a life insurance policy? Is this a whole life policy? If so, the commissions are very expensive. Who is this friend, and why did he recommend you do such a thing?
Check out: Net Worth Targets By Age, Income, And Work Experience
Thx
My original (mis)understanding of long-term savings (again, having not researched a lick of anything previously) was incorrect, and I was led to believe that life insurance was the safest bet for guaranteed income. Guaranteed interest rate is 3% and currently sits at 4%. I’m meeting with my agent tonight in order to discuss cutting back on my premiums, and then reallocating most of these towards maxing out 401K. Thank you for the input!
Your insurance should reflect the amount of risk your spouse & dependents would have, if your income were to go away.
Price out term insurance for 20 or 30 years, and get that in place first. After establishing the right amount of term coverage for your situation, you would then have the option to cancel the existing policy.
I think this article is great… assuming you make at least $50K per year. My first couple years out of college, I only made $19K per year and I bought a house to save money from rent (it was actually cheaper to own than rent in that city). Then, I would have totally laughed at this article. How do you save $18k per year when you only make $19k LOL.
In all seriousness, save more—everyone save more. You will learn to live with less disposable income.
I’m 29, working since out of college at 22, not married, I have about $260K liquid net worth. Right now I’ve got $50K cash, $50K in my 401K, $10K in an IRA and $150K equity in my home. I own my car outright. I’m about to get aggressive with my 401K and start maxing it out, I just got a job at a company that matches 8% a year.
I wouldn’t count the equity in your house as liquid since you have to convince someone to buy it for the price you think it is worth.
Am I uh missing something?
Lets say you have 20,000 in an ica roth at 30. If you contribute 100 per month into only this fund with reinvestment it would be worth 600,000 when you are 70, assuming an 8% return.
Are you trying to adjust for inflation by cutting out ROI?
My husband got laid off two years ago at the age of 55. He was a senior computer engineer making about 120,000 per year. We started with nothing, he did not even speak English when he came to this country. I worked while he went to school and then he got a paid internship and worked in the day and went to school at night. In 1996 we moved to a low cost of living state and he started at a job making about 50,000 with two small children and a wife to support. He played offense by being good at his job so he advanced. I played defense, learning about all things financial, being frugal, etc. As a result, the lay off was a blessing in disguise as his job had gotten mega stressful and they paid us a decent severance. It is possible to retire early but you have to educate yourself and see money as a means to buy your freedom not as a means to buy more things.
Brilliant. I disagree with, also, maximum 401K contributions—Financial Samurai is VERY WRONG ON THIS ADVICE. it is not freedom inducing; it is fooling yourself in to more long term servitude until a magical day in the future when you can access it at low tax cost — when you’re too old.
A 401k should be but a SMALL portion of one’s wealth. Build multiple passive income streams for now. I am free because I have done this.
I also continue to contribute to a Solo 401k and get SEP IRA contributions as well in early retirement. I see ALL pre-tax retirement money as BONUS / INSURANCE money, just like my Social SEcurity. Max your 401k, make it automatic, and if you’ve got hundreds of thousands or millions of dollars at your disposal at age 59.5, then wonderful. If not, it matters less bc you never counted on it.
Related:
Why Everybody Should Start Their Own Website And Be Their Own Boss Today
Disadvantages Of A Roth IRA: Not All Is What It Seems
I am writing all this to you from 100% experience as a free man. What is your background?
Too old?
I maxed out my 401k and retired at 55. Living the dream, man.
Sam, you can tap a 401k at 55, provided you are ‘retired’ from that company. IRA is 59.5; it’s a key difference between the two.
It is important to note, when contemplating early retirement (as people on this site do), that you CAN withdraw 401(k) and IRA funds before the age of 59 1/2 or 55 or whatever WITHOUT a tax penalty, but only if you do it properly. This is under section 72(t)(2) of the tax code, I believe.
As I understand it, you just need a “substantially equal periodic payments” (SEPP) plan that spreads the payments out for your actuarial lifespan, seen from the day you start this plan. (The payouts must be set for the longer of five years or the day you turn 59 1/2.) So you can’t just raid it willy nillly, but you can start to live off it.
So if you have $1M in an IRA at age 50 and want to retire, you set up the plan with your custodian. There are several different ways to calculate it, but I think the simplest just looks at your lifespan remaining and splits it equally. At age 50 your remaining lifespan is 29.58 years, so you can take $1M divided by 29.58, or $33,806 per year. Maybe that’s your “safety net” base of $3K a month to live off, while you pursue other jobs.
So, that may seem complicated, BUT when people say 401(k) and IRA lock your money up forever, as one of these posters did, it isn’t true, and you can avoid the penalties. If you’re disciplined enough to retire before 59 1/2, you’re disciplined enough to do some calculations and set up this SEPP deal.
Sam, maybe you should write about this. It isn’t for everybody, but I can say that in my late 40s, it was comforting to know that my growing IRA balances could actually be a safety net if my professional income dropped. (It hasn’t dropped yet, at 53, but it might soon. Still comforting to know the SEPP option is there.) I don’t like when people forego the 401(k)/ IRA benefits on the basis of misinformation.
Hi Sam,
Great article. It is scary to look at the future of retirement if taking in consideration inflation, however, low inflation will be the new norm thanks to the cheap Chinese products and a slow in consumerism from develop country.
I notice you preach about Personal Capital, sound like a great product but available only in US.
Do you have any other solution for international investors?
This is kinda ridiculous. I have only been offered a few jobs since graduating 3 years ago, and none offered benefits or contribution of any kind. The income I brought it in barely allowed me to cover anything after accounting for rent, utilities, insurance, food, random bills. And before you say, “Just spend less”, or “get a roommate”, I already did that. I’ve now had to work as a freelancer because the market is so hard. But I get taxed higher there. I’m lucky to walk out with $50 at the end of the month, and it’s not smart to invest when you have literally nothing.
This is great if you have a great job, but like the majority of Americans, I’ll be working till I die.
Check out: Income Profiles OF Financially Free People. Are you working 80 hours a week to try and get ahead? Have you started your own website to leverage a platform that could rich out to millions to brand yourself and sell your products and services?
If not, don’t worry. You’ve got so much upside. Once I started Financial Samurai in 2009, a whole new avenue of making money came to me, even though making more money was not my main gaol for starting this site.
Yes actually,
I work around 80 hours a week (actual work, education, and business building), as well as run a monetized travel blog. I also have a website offering my animation and commercial services.
There are income limits on Roth IRAs. For traditional IRAs there are income limits with regards to whether you can deduct it from your taxes. Those income limits only apply if you have a plan at work such as a 401(k) or a pension plan. Below is the site to find the income limits as to whether a traditional IRA is tax deductible for you.
Why would you contribute to an Traditional IRA and pay taxes on post tax money (since you cannot deduct the contribution at some point due to income limits) and not put in a taxable account and be able to pay only capital gains? Taxes in retirement is a real thing and people do not pay enough attention to it. There is a real possibility you can pay more in taxes in retirement than when working due to a loss of deductions like college loans and mortgage interests, as well as if you have a healthy nest egg due to minimum required distributions and social security combined. Taxable accounts are definitely a necessity as part of the game because its fixed capital gains as opposed to possible earned income.
I am in the middle of the chart at 29 years old and 150K in my 401k but admittedly that is a little bit skewed because I have a 7% company match and 2013 was a crazy year. I only began maxing out my 401k at 25 so I am behind where I should be. I do not qualify for an IRA, are there any other pretax retirement strategies I can use Sam?
Focus on maxing out your 401k. And if you want to contribute even more to a pre-tax retirement account like a SEP-IRA, you can start a side business, make money, and contribute 25% of your operating profits up to $53,000.
See: How To Save More Than $100,000 A Year Pre-Tax For Retirement
Finally, always keep learning and pushing your savings contribution to the max!
Check out: Financial Checklist For Financially Savvy People
How does one not qualify for a traditional IRA? There are no income limits.
Some people equate “no tax benefit” as “not qualifying”. If you make too much, you don’t get to deduct the IRA contribution. But say “hello” to back door Roth conversion.
Sooo I graduated from collage 3 years ago. It took me 3 years to get a job in my degree. Base income is 32,000 a year.
24,000 after taxes.
Rent/ utlities is 1000/month
Student loan payment is 400/month for 10 years
Groceries/gas/phone is about 400/month
Leaving me 200 a month and that’s never going out or spending anything. If I need new clothes, good luck. Car breaks down or need an oil change, good luck. Break my leg, can’t go to a doctor. Just gotta walk it off.
So say I can save that extra money, that’s 2400 a year. After 30 years I’ll have 72,000.
Don’t kid yourself, the average American can not save or invest… I’ll be working til I die. That’s the truth about retirement.
Check out TaskRabbit or Uber if you have a car to make extra side hustle money. I do an extra 10-30 hours a week on top of a regular 40-50 hour week.
Do you have kids, Sam? I remember that you’ve written posts regarding cost of kids and impact on potential savings. I’d imagine that you’d have to be more creative with your time on the side hustles if you have to take the kids to activities during the week/weekends.
Your $1000/month living expense is too high for your income. That’s what is killing your budget. And before you say “I can’t get anything cheaper”…. get a roommate. Live as cheaply as possible.
And “side hustle” like FS recommends.
If you were to work for 40 years, investing (Roth/IRA) $2400 each year and earned 9.8%, then you would have over $1 million in retirement. This is not unrealistic.
9.8% return….where???
I have the same question. I haven’t found a Roth/IRA paying more than 1-2%/year. Combine this with the economic constant of inflation at ~3%/year, and you’re essentially putting money in an account to lose value to the tune of 1%/year on average.
Same question here……My roth account with Fidelity’s return is very low…
The example used 9.8% and 40 years to counter the point about “no hope”
The original poster stated that there’s no hope of retirement when saving $2400 a year, calculated with 0.0% investment returns.
What has been the historical average return of the S&P500?
last year was not great for returns, but one has to examine the longer term results (from 3, 5, 10, 15 years). That’s no guarantee of the future, but it needs to be considered in the context of long-term investing.
You will be working ’till you die. Retirement is a false premise created in order to phase out the older generation of the workforce. It has never been a standard until the last century, and soon will need to be phased out due to the lack of resources that are required to sustain it. Also, retirement isn’t necessarily a good thing; look up the health effects of retiring. It is painted as a pretty picture of free time and vacations. What people don’t talk about are the health problems associated with the abrupt end of 45+ year mental and physical routine.
If you hate work, then working ’till you die sounds like hell. If you find a place where you actually enjoy your work, then working ’till you die sounds great.
Oh crap!
I literally retired today after 30 years in aerospace.
I followed the guidelines here (though I was doing this before I ever found this site). I just turned 55 a few weeks ago.
I guess I’m hosed now!
Congrats! Welcome to the death spiral
LOL…Wookie, you cracked me up just now! Hope it’s not that hopeless for you…
I’m going to ask a very dumb question. How does a high income couple save more for retirement after 401K and IRA contributions are maxed? I max out my 401K at $18K, but he can’t because his company restricts his contributions due to being a high income employee. He can only contribute about 5%. We both contribute $5,500 to our IRAs, but we have more to save, and we are playing a bit of catch up here at 45 years old. I make 100K, he makes 200K.
For you, have you checked whether your company offers additional post-tax contributions? Mine does, up to the federal max of $53k.
For your husband, does the company offer any deferred compensation plan? A caution there, those are generally not covered by ERISA, so if the company goes under, you could lose your money
Failing those, most people just open brokerage accounts and save that way. If you’ve got the money, it’s nice to have some diversity in the way it’s structured.