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 in 2019 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 2018:
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 is $19,000 in 2019 and will likely increase by $500 a year every couple of years to keep up with inflation.
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 several 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) was about $400,000 when I left work at age 34 in 2012. It has grown to about $550,000 in 2019. What I miss about work was my $20,000 – $25,000 a year in profit sharing. That addition was a huge boost to my annual 401(k) that cannot be underestimated.
It was only until 2014 when I realized I could open up a Solo 401(k) with the freelance income I was generating. My Solo 401(k) now has about $200,000.
Case Study Six – A Nasty Divorce
A reader shares his story,
Case Study Seven – A Bear Market
After 10+ years of a bull market, the bear market finally came back starting in 1Q2020. The S&P 500 at one point lost 32% in a matter of weeks. It has since clawed its way back in expectation of a second half recovery. However, the downturn clearly hit a lot of 401(k) portfolios hard.
I’m optimistic that the Fed and the government will do everything they can to support the markets and the economy. Further, I’m optimistic that the coronavirus curve will flatten in the second half of 2020. However, a bear market is a clear wake up call to diversify.
Instead of just investing in stocks, consider bonds and real estate. Real estate tends to significantly outperform during downturns if real estate is not the cause of a downturn.
Take a look at the historical investment returns of Fundrise, my favorite real estate crowdfunding platform, during tough stock market years.
Life Happens To Us All
We all know we should be maxing out your 401(k)s but don’t because something always seems to get in the way.
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.
Here’s another chart comparing the median and average 401(k) balance by age and my 401(k) guidance if we continuously max out your 401(k) each year.
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 a year.
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 in your after-tax investment accounts to generate passive income. You can no longer count on a pension or Social Security to support you in retirement.
The only thing you can count on for living a comfortable retirement is you!
Recommendation To Grow Your Wealth
The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.
One of their best tools is the 401K/Portfolio Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button. Another awesome feature is their Retirement Planning Calculator which uses your real inputs to run a Monte Carlo simulation to best estimate your retirement financials. Definitely see how you stand!
Updated for 2020 and beyond.