You likely won’t be able to live off your 401(k) alone in retirement, but you should be able to combine your 401(k) with alternative savings, other passive investments, and Social Security to live a financially free life when the time comes to withdraw at the age of 59.5. Most Americans don’t have pensions.
The reality is that the median account balance in the U.S. is only around $72,000 for 55-64 year olds according to Vanguard, one of the largest 401k managers. The average 401k balance for 55-64 year olds is roughly $178,000. But the average is screwed up to due the super wealthy. Even with $178,000 in your 401k at retirement age, you aren’t going to be living it up for the next 20 – 30 years without alternative sources of income.
According to data from Fidelity, here’s the average 401k breakdown by age in 2017:
Ages 20 – 29: $9,900
Ages 30 – 39: $38,400
Ages 40 – 49: $91,000
Ages 50 – 59: $152,700
Ages 60 – 69: $167,700
Ages 70 – 79: $160,200
Given the median age of Americans is 35.3 according to the US Census Bureau, the median 401(k) balance per person should be closer to $150,000 – $500,000 according to my 401(k) retirement savings guide instead of these pitifully low levels.
In this article, I’d like to share some stories on what happened to all the missing savings because we all know we should be maxing out our 401k every year for as long as we work.
Financial Samurai 401k Savings Guideline
The below chart shows what a typical 22 year old college graduate should have accumulated in their 401(k) if they followed my advice and started maxing out their 401(k) after two years of working. The maximum pre-tax contribution amount rises to $18,500 for 2018 from $18,000 in 2017.
I’ve divided the chart into three columns to account for older savers, middle age savers, and younger saves due to the different maximum contribution limits. I’ve also accounted for different return and company matching metrics.
The bottom line: everybody who consistently contributes to their 401k over a 38 year career will likely have at least $1,000,000 in their account. The 401k savings targets by age can also act as a total savings guideline as well if you wish.
401k By Age Discrepancies Explained
I’ve been consulting with more clients about their personal finances and what I’ve discovered is that something always seems to come up and knock someone off their retirement savings path. It’s all fine and dandy to assume everyone should logically max out their 401(k) or at least save 20% of their after tax income until retirement, but this is seldom the case.
With consent from my clients, let me share three case studies to illustrate some points. I’ll also highlight one reader’s e-mail feedback about the topic as well as my own example. Names are changed for privacy reasons.
Case Study One – Family To Support
Joe is 42 years old and makes $120,000 a year as an engineer. He’s been working for 19 years and has $80,000 in his 401(k) (vs $300,000+ recommended). When I asked him to share his 401(k) situation he shrugged. He never considered maxing out his 401(k) because he always thought he wouldn’t have enough money left to take care for his wife and son. His wife worked for the first eight years and decided to stay at home after giving birth. Going from a two income family to a one income family is difficult if you’re not use to saving half.
Joe has about $12,000 in after-tax savings which will cover about four months of living expenses just in case something bad happens. Given the thin buffer, we talked about the importance of getting long term disability. When I dug deeper, I realized Joe has a penchant for fixing up old cars. All told, he’s spent over $60,000 after taxes to beautify his two 1965 Mustangs.
Case Study Two – Expensive Living
Sally is 32 years old, and makes $75,000 + bonus as a medical equipment sales rep. Sally got her Master’s degree in healthcare, and graduated with $27,000 in debt at the age of 24. She pays about $500 a month in student loans which she plans to pay off in 10 years tops.
After seven and a half years of working at a reputable firm, Sally has $70,000 in her 401(k) compared to a recommended $127,000 after eight years of work experience according to my guide. Sally only contributed 10% of her annual gross salary into her 401(k) because of her school debt, car payments, credit card payments, and $2,600 a month rent here in San Francisco. Sally’s case shows that education is expensive and good paying jobs come with higher cost of living. Sally has about $5,000 in savings in the bank.
Case Study Three – High Income Burnout
Susie is 34 years old, single and makes $150,000 + bonus as a VP at an investment bank based in San Francisco. She’s been working for 12 consecutive years out of college. In between years 10 and 12, Susie took a 1.5 year hiatus to become a baker during the financial crisis. She was burned out and wanted to try something new. But, after spending $25,000 for tuition, missing out on 1.5 years worth of income, and getting screamed at while making only $10 an hour, she realized being a baker at a restaurant was not for her. “If I’m going to get yelled at making $10 an hour, I might as well make a lot of money!” Susie joked.
Susie has about $150,000 in her 401(k), 50% higher than the current median according to Transamerica. However, given she didn’t earn any money for 1.5 years and payed a lot for tuition, Susie is also about $50,000 light based on my guide. Susie was only contributing about 10% of her pre-tax income to her 401(k) for her entire career because she didn’t want to tie her money up beyond the company match.
Case Study Four – Highly Educated Couple
An e-mail from a reader responding to the Average Net Worth For The Above Average Person article:
“I noticed that most of your posts are geared towards people who start working at age 22 with minimal debt – as just one example, your “above average” people projections.
But many “above average” people do not start working at age 22 and incur substantial debt before they start working. For example, I am a lawyer that obtained a master’s degree and then a law degree before starting my career at age 28. My wife is a doctor, who completed her residency and started practicing at age 28 as well. Both of us started our careers with substantial student loan burdens – over $325,000 between the both of us.
Our late start means we lose a lot of the magic of compounding interest. And our debt burden takes a big chunk of our monthly income. These are significant challenges.”
Case Study Five – Early Retiree
My 401(k) has grown to roughly $415,000 as of today at the age of 35. Although $415,000 is roughly $80,000 above the high end of the range for someone who has contributed for 13 years, my 401(k) is at serious risk of falling behind given I no longer contribute or have a company match. My last year of work saw over $25,000 in company 401(k) match that I’m starting to miss. Cherish your 401(k) match and profit sharing while you still got it!
Based on a conservative portfolio analysis (4% per annum growth, no contributions or match), my 401K will grow from $400,000 to roughly $1,100,000 by the age of 65, the low end of my guide. Although I think 4% per annum growth is feasible, I still fear horrendous bear markets in the future. A company match and profit sharing buffered my portfolio extremely well during the downturns of 2001-2003 and 2008-2010. I now feel my portfolio is swimming naked, which is why I need to be extra disciplined in my rebalancing.
Case Study Six – Divorce!
A reader shares his story,
We’ve read seven examples of people who do not meet the range in my 401(k) Retirement Savings Guideline chart despite earning healthy salaries. I also do not feel 100% confident I’ll reach the middle or high end of my 401k savings target of $2.5M and $5M by age 60 because in 2012, I left my day job and have worked for myself ever since.
My day job provided a $20,000+ a year profit sharing contribution in my 401k for my last five years. They would have continued to contribute $10,000 – $24,000 a year if I stayed. Now, I’m left with contributing to a Solo 401k based on the operating profits of my business. The first year I left, I was so swamped with setting up my business that I didn’t contribute to my 401k. In my second year, I maxed out my 401k, but didn’t realize I could contribute an employer portion as well.
But now I’m back on track, contributing roughly $30,000 a year to my solo 401k because I can afford to. The maximum I can contribute is $55,000 for 2018, but that would require me having operating profits of almost $200,000 a year. Thankfully, I’ve also been aggressively saving and investing an in after-tax investment portfolio since I value liquidity more as an early retiree / entrepreneur.
Here’s another chart on the realities of how much the average American has in their 401k:
Don’t Just Be Average With Your One And Only Life
Life gets in the way of our retirement savings plans all the time. We have tuition to pay, expensive cars to fix, vacations to take, concerts to attend, shoes to buy, Range Rover Superchargers to drive, alimony to pay, sickness to deal with and economic dislocations to experience. Some of us just like to honestly blow lots of money and not give a damn! There’s always an excuse for not saving. However, if you don’t want to become one of those tragedy stories or a burden to your fellow citizens, then I suggest increasing your 401(k) contributions and after tax savings percentages.
If the amount you are savings doesn’t hurt, then you are not saving enough. At the end of our careers, we only have ourselves to blame if we come up short. Unless you have developed alternative income streams, paid off your house, and have other after tax savings, living off $350,000-$500,000 for the next 20-30 years is just $12,000 – $25,000. Pay yourself first before anything else and max out your 401K. After you’ve maxed out your 401(k), figure out where you can save some more.
Recommendation To Build Your Net Worth
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Updated for 2018 and beyond. We are in the ninth year of a bull market. Now is more important than ever to stay on top of your finances and have a proper asset allocation. You don’t want to give up the 200%+ returns since the bottom fell out in February 2009.