The median 401(k) retirement balance is low. 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 2020:
- 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.
Median 401(k) Retirement Balance Calculations
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.
Median 401(k) Retirement Balance 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,
What is misleading as to why many 401k’s are half or less what they should be is one word…DIVORCE. I am currently 44 yrs old. 7 years ago at age 37 I had $125,000 in my 401k and then….BOOM! Stock market crashed and my 401k was worth $80,000. Yeah not fun. 7 years later it has now recovered but that’s lost years and now my 401k is worth $130,000 and I’m getting divorced and half goes to my wife.
Now I’m back to $65,000. Ridiculous. Over 50% of married couples get divorced and many men are paying Child Support and Alimony and aside from losing half our retirement we now have nothing for years to invest…but I digress.”
Case Study Seven – Medical Debt
Medical debt is one of the leading causes of bankruptcy in America. Deena, 51, explains, “I have a rare disease and nearly died (which means time in the ICU, operations, and 1 – 6 month recovery where I work part time or not at all) in 1995, 97, 99, 02, 03, 05, 06, and 07.
Then I met the love of my life, who had ovarian cancer and passed away after 4 painful years. Because she was the wrong gender, we could not legally get married, so her insurance and medical costs were in the hundred of thousands of dollars.
Medical debt on top of not being able to work is a huge factor that needs to be considered. After 10 years, I have just finished paying off both of our medical debt.”
Technical Reasons Why 401(k) Balances Are So Low
Now that we’ve heard from seven different case studies why their 401(k) balances are so low, let’s look into some technical reasons as well.
Four aspects of the U.S. retirement system could explain the discrepancy between potential and actual accumulations at age 60.
• First, the immaturity of the 401(k) system means that many 60-year-olds did not have access to a 401(k) plan early on in their careers, so they would have accumulated less than workers covered throughout their work lives.
• Second, the lack of universal coverage means that workers are not always in jobs that offer retirement plans and, therefore, are not always able to contribute.
• Third, participants’ ability to tap their account before retirement means that accumulations leak out.
• Fourth, fees can significantly erode net returns on investments.
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. Fundrise is my favorite real estate crowdfunding platform, especially 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. Who would have thought a global pandemic would shut down the economy for over four months? Crazy!
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. No wonder why the median 401(k) retirement balance isn’t very high.
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. The goal is 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. This way, you can see where you can optimize.
Before Personal Capital, I had to log into eight different systems to track 28 different accounts. Now, I can just log into Personal Capital to see how my stock accounts are doing. I can see how my net worth is progressing and where my spending is going.
One of their best tools is the 401K/Portfolio Fee Analyzer. It has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. It’s the best tool to help you beat the median 401(k) balance by age.
You just click on the Investment Tab. It then runs your portfolio through their fee analyzer with one click of the button. Another awesome feature is their Retirement Planning Calculator. It 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.
I always recommend starting saving for retirement while you are young. You may only start your career in you 20s, maybe even 30s, but you are probably working and some of the money could be used to save for retirement. I was capable of saving 5 figures for retirement before I was 20 and before I started my career. That is a rare opportunity though and I understand why people may not be able to pull this off. But even if you only start with a thousand you would have more than the median person if you invest in a stock portfolio.
I am looking at a related subject or which there is almost nothing out there so wonder if the readers of this blog have a point-of-view on this. One pension fund manager mentioned that Boston Consulting Group did a survey for them. One of the unintended and unanticipated outcomes is that defined contribution (401k, IRA’s etc) retirees actually save more IN RETIREMENT than those that receive a regular pension. Presumably because of the certainty of the income flow. Are there any other studies or personal experience that bear this out?
Can you take money out of a traditional IRA, then transfer it into an existing ROTH IRA? What are the tax consequences?
thanks,
Debra
The most common reason for low average 401k balances wasn’t mentioned anywhere: most people have multiple employers, and hence multiple 401ks, over the course of their careers. What matters then isn’t the balance in each individual account, but the aggregate amount for an individual or family. Financial surveys, and the resultant advice, should be focused on that statistic.
This. Less than 10% of my portfolio is in my current 401k, and I’m likely about to make another move. Surveys of 401k balances in isolation are not at all useful. What’s the average tenure these days, 5 or 6 years?
I’m 27 and making started making $40k and now I’m up to $65K in D.C. I’ve already stashed away $20k in my retirements accounts and that’s after paying off $78k in students loans. If you’re making $50K+ then there is definitely a way to fill up your retirement unless you have kids then that will make it tougher, but I know people doing it.
All here is well and good advice. Let me add one thing to it. Passive income. The POWER of actively investing vs handing your money all to someone else for hopeful 7% returns year over year.
Take that cash in 401k if enough and buy rental property potential place with low risk. Rent them. Generate positive cashflow on them as early in life as possible. Pay the interest back to your own 401k you borrowed from. Properties paid off by retirement, or if you generate enough substitute a salary and retire early pursuing your own business or life dreams.
401k is a must I agree, but its foolish to bank your retirement on how the economy is going to be doing when its time to pull it out.
Stats – 34. 5 kids. Wife makes 60k Salary, I make 50k salary. My 2 rentals net 1k positive cash flow while also paying all taxes and mortgages. We also own our house now that we live in.
Networth above our debts is 150k. Average person our age is 8k networth give or take.
at 28 I had zero 401k, 40k in debt from a divorce, no house, horrible credit. Meet with a lender on how to obtain your first property as soon as possible. Go FHA, live in it 2 years, move out, rent it. Do it again.
The 8k down on my first place will net me over 1 million in cash over 30 years. Half of this will go to the taxes and loan of course, but thats 500k in cash flow. After 30 years its paid off unless I do it sooner. I can tell you that 8k in a 401k will never compound enough to do that.
Disagree, at my company I’ve seen people’s 401K grow to 1 million in 10-15 years. I’m small on the totem pole at the company 13 years in, have 600K in my 401k and I’m in my early 40s and started late investing in my late 20s
Hi Sam,
Dusting off this older post. I was wondering if you have any advice for how to save if you have a pension set up with your company of employment? I realize that this is rare to find these days – but it also means that I can’t find a lot of advice online on how to save when I have this to fall back on later.
Some context: I live and work in San Francisco and am 28 years old. I contribute 8% pre-tax to a 403b and have a pension plan with my employer on top of that.
Thanks!
I would save as if the pension plan wasn’t there at all. Take control of your own financial destiny, because there are no guarantees that pension will be there when you retire.
I graduated college with lower debt.
Highly Educated Couple (late start, high college debt) – This is one of the reasons why I’m against the constant rant to tax high income. Everyone ignores the making of the pie, they just see the result and want to help themselves to it.
I like how he doesn’t even respond to this case study 4. He just quotes a comment he receives. Nice case study, genius. Nobody has 500k in 401k at 35 except some investment banker who had connections to land a very high paying job right out of college. This whole article and all of your projections are a joke. I’m in the 95th percentile and have been quite prudent in my savings and have 120k at 34.
There is another possibility. You’re actually not in the 94th percentile and you’re not doing as well as you think. How long do you think you can last on $124,000 in retirement savings?
Brilliant response. I suppose that *is* a possibility. Tell me what percentile 235,000 AGI is though.
And considering I’m not retiring at 34 and plan to save for another 30 years or so I don’t have to worry about your hypothetical question.
$235K AGI is around top 5% in income, but that’s worse if you only have $124K in savings. I thought you meant 94th percentile in retirement savings amount.
But like you said, if you plan on working until 64, your retirement savings amount is not bad at all.
Just know that plans do change.
https://www.financialsamurai.com/importance-forecasting-misery-happier-life/
My point was that you didn’t really do a case study 4. Many people in high income brackets are there because they did graduate or professional schools (JD/MD/PhD etc) and didn’t start working and saving at all until almost 30 and the oftentimes were saddled with very large student loan debts to repay first. My other point was that your target for young savers is really only possible if you somehow come out of undergrad and land yourself a six figure job and have no student loans. those projections are just not realistic for 99% of people.
Hi Mark,
I did not had $500K at 35 but it was pretty close (approx $440K). I am not an investment banker and did not land 7 digit salary out of college (started out making $44K). I guess my trick was not to start family and buy a house until I was almost 40. I maxed out my 401K and invested as much as I could in after tax money into stocks. I realize this is not a typical situation as most people choose to start family in late 20th/early 30th. My point is that it is possible even without 7 digit salary, but obviously large salary helps :)
Thank you,
J
Living with your mommy and daddy doesnt count
Personally I think you need goals for your accounts in retirement. It is inadequate to just “max out the 401K” as a plan. It ignores the actual granularity of need and risk in retirement. In retirement the 401K will help you max out your taxes. Tax rates are progressive and RMD is progressive so your tax bill is progressive squared. In retirement since the government owns part of your money and is in control of distribution if you have a big wad your screwed. If tax rates go up or RMD % goes up your screwed squared. In retirement you need WR money and self insurance money. WR money to live on and insurance money in case you get cancer or start alzin. The chance of cancer is 1/3 and the chance of serious cancer is 2/5 of the 1 that gets it. The average treatment cost can be as high 92K/yr and the average joker that is afflicted is broke in 4 years. Alzheimer’s has a 1/10 incidence at 65 increasing to 1/3 by 85 and has a 12 year average longevity meaning on the average you can linger for 12 years before death. If you are married both of you are going to die so there is a better than even chance one or both is getting an expensive disease. In addition taxes are often calculated around married filing jointly when a spouse dies and RMD is in force it can kick the surviving spouse up 2 additional brackets as a single. So your max out strategy is a Sword of Damocles waiting to lop your wife’s financial head off once you kick the bucket. A better choice is to max out tax efficiency in targeted accounts. In my portfolio I have a Roth account with $1M I Roth converted from the TIRA/401K. I left 600K in the TIRA in bonds. When that RMD’s it will throw off about 30K/yr as a taxable annuity and grow slowly. My SS is 50K of which .85 or 42K is taxable married filing jointly is good to 104K top level with standard deduction meaning my 72K income can grow for many years and still be in the 12% bracket. In the 12% bracket I can pull post tax money out cap gains free so I can easily pull an additional 50-60K/yr out at virtually no more tax. I also have a few hundred K of tax loss harvest available from recessions gone by for when I finally move from .12 to .22. This is maximum tax efficiency. If I die my wife’s taxes go up slightly not dramatically. I have several mil in post tax money to draw from as needed. The Roth just sits there compounding and I don’t consider it as WR money at all. It’s insurance and legacy money if I alz I’ll be in a good nursing home instead of a snake pit If we both alz there is enough there to get the job done. If the widow make takes me and my death is cheap my kids will eventually get the Roth. So that’s 4 accounts earmarked for specific reasons taxable tax loss harvest and residual TIRA is for WR and Roth is for insurance/legacy. I also have a 2 tier risk profile My main portfolio is risked at 10% or 2/3 market risk but I have a low 1/4 market risk “emergency fund” risked with a total stock short term treasury efficient frontier tangent portfolio. It turns out the biggest SOR risk is in early retirement. If you have 3 or so years of WR in a low risk account you can close off the high risk portfolio until the recession is over re-balancing as necessary. By living on the low risk money you effectively re-sequence the SOR profile to a better sequence saving the portfolio. The ability to re-sequencing is most important in early retirement. About 10 years in you can start some withdrawal from the emergency fund if desired. You need to fund all of this as you grow your money.
If you look at your Personal Capital monte carlo graph it proceeds to age 93. It has a maximum projected. THIS IS YOUR STARTING POINT. You calculate the max projected at your death and work backward to whatever age you are now and that informs you on what you will need to save and how you divy up the money into accounts based on tax efficiency. Then and only then will you really understand how to adjust your appetites. My projected end of life portfolio is 15M my projected need between now and my wife’s eventual death is 5M. I will likely go first, she is younger with long lived genetics. I have it planned at the 50% confidence level, 10% and 5% and have a 99+% chance of success regardless of SORR
But arguably shouldn’t the balance be low for most young people because they should be throwing their money at student loans and other debts first?? These numbers are astronomically higher than they once were. If many company’s don’t offer a match anymore isn’t it simple math to put off 401K contributions?
Wasn’t able to start putting into a retirement fund until I was in my 30s, mainly due to a combination of student loans and medical debt, and with my income I can’t even come close to maxing out my contribute to an IRA alone (the mere idea of also having a 401k almost blows my mind – I’d be homeless). With that said, according to these figures, I’ll likely never retire. With the aforementioned medical issues this likely won’t be an issue, but it still warrants some rumination. In fact, the only people I know who come close to meeting these goals are the small minority of individuals who make 150-200k annual income, which are no indicative of the adult population at large. With cost-of-living going up, wages stagnating, and most people making abysmal 50-figure incomes, becoming a swing trader with a bunch of investment properties isn’t an adventurous risk, it’s just not a reality at all.
Mr. Samurai,
You always post such an interesting and insightfull articles. I will share my part. Me and my wife are engineers. I am 37 and she is 34. I started working from age 28 with a PhD and she started working from age 29. In sort, for around 10 years of work I am able to save $190K in 401K (including employer match (5%) from old company and maxing out from last 5 years and no matching from new employer). My wife has $115K with 5% employer matching.
Do you think, with two ( 4 and 7 year olds) kids, together we saved around $300K in 401K so far, is good. No debt except mortgage. Are we on right track?
Please let me know.
Thanks,
Sam
Maybe you shouldn’t compare your live with 99% of us american who struggle to make ends meat. Everyone is saying the economy is so well but my wage hasn’t gone up in the past 8 yrs except for the COLA. I actually find these figures great. I’m 36 and I wish I had 24 grand in my 401k
You really think 99% of Americans struggle to make ends meet? We live in the wealthiest country in the world where making $30,000 a year puts us in the top 1%.
Abolish welfare mentality. There are janitors making $250,000 a year.
I don’t want to write financial posts about making readers go broke and miserable.
Related:
Ranking The Best Passive Income Streams
Is that suppose to help me and make me feel better? How? I earn 48k a year and can’t barely put food in my Family’s table so I’m sorry if I don’t feel I live in the wealthiest country in the world! Maybe you do !
No, but it should help motivate you to realize that you can work on a side hustle, start your own website, or do other things to help you make more money. But at the end of the day, it’s up to you.
Sad state of affairs where people have to have side hustles to have financial security.
Remember in the 80s when a shoe salesman in Chicago burbs had a house, SAHM and a few kids… sure he was broke and could barely afford food, but at imagine on a shoe salesman salary these days
This was the same shoe salesman that also scored 4 touchdowns in one game while at Polk High, right?
Move to pittsburgh. Happens all the time.
Mark,
What are you talking about? Job markets change. Your comment is like saying “Remember the good old days when a stage coach driver in LA had a house, a SAHM and a few kids…sure he was broke and could barely afford food, but at [sic] imagine on a stage coach driver salary these days.”
Mark, labor markets change. People buy shoes online for much cheaper than they ever did from a shoes salesmen with a much wider, diverse selection. Get use to it. And stop whining.
Isn’t another reason why 401k balances are low is that people go to different jobs? When people go to a different job they often roll over their 401k to IRA. Then they start their balance of 401k at zero. I think these statistics from Fidelity and Vanguard are misleading when they look only at 401k and accounts rather than the sum of 401k and IRA.
Sam,
Interesting article. Reading it and the comments…my concern is that for most people it’s unreasonable. I don’t see how most people can afford to max out their 401K and do what you suggest. I’m not saying you aren’t giving great advice. It’s just life gets in the way.
I’m 47 yrs old (Old man), worked at NASA for 22 yrs after grad school in Houston. Pay is ok, I make around 100K now (Started at 30K). I have a 25 yr old daughter, that I had to pay for school. I had a hurricane destroy my house. So expensives pop up.
So even though I make a good salary, I can’t make the max contribution. I know a lot of people around my age that either don’t have a 401K because they can’t afford it and are just surviving or barely contribute.
I would love to max contribute. I currently can only sock away 8% with a 5% max. I do have 333K so I will maybe make your low end.
Your comments above seem to be above average salaries. I mean the average salary is what 60-70k in the US?
I am curious. Why you are doing total savings vs salary? Most sites do a percent of your current salary that they expect you to live on.
Again, great job. Look for me under a bridge in 20 yrs!
“I mean the average salary is what 60-70k in the US?”
I’ve read that is is within that range, but I have also read that it is in the 50s. If you have a handful of people who make 30k, and one who makes 120k, though, it tends to fudge the numbers.
Your article is a good one. Im a small business owner and my wife and I are quite a bit behind your threshold and plan on retiring early. Our stats are ages 34 & 36. 155k wife IRA, 130k in mine. 400k in brokerage account. 785k in real estate that’s owned free and clear. 35k in universal life insurance policies between the two of us. There area lot of different vehicles people have for retirement. Even though I am way below your threshold I am confident we will be able to be FIRE and retire early. My vehicle has the brokerage account and it has real estate. Now having said that you should discuss some of the other alternative spots people may have money. Especially the higher wage earner you gave examples of. Earning 150k a year you can still only stuff 18,500.00 in a 401k. They should be exercising options. If they can’t afford to save additional they are likely living beyond their means. With a 401k the appreciation really starts to hit hard in the last few years the money sits there.
Good information. It is always easier to comprehend in a “case study ” example that you can compare to your own real life. There were at least a couple case studies to which I could personally relate.
I would like to make an unsolicited and likely unwelcome point on case study 7. I don’t know if a political statement was being made or what the intent was, but I hope it is obvious to others from the case study. If she could not be legally married because the “gender was wrong”, this person would have no legal responsibility for the deceased loved one’s medical bills. Paying them out of some misguided loyalty to the deceased seems foolish in this example.
I realize this was probably just a fictional example to illustrate the situation. In addition to being more careful savers, it is just as vital in the long term for people to be more educated in their spending at the same time. Seems like many $1000’s and sleepless nights wasted over a non collectible debt. The law is the law, so hopefully, a spiteful decision to prove a social point didn’t elicit them to join these estates in a trust outside of a legal marriage. If so, it backfired and put the other partner on the hook for financial disaster. For my social statement, it is even more egregious that if they were legally married, the surviving spouse would still be on the hook for these debts after such a personal loss. But, like I said, the law is the law.
Sam, how confident are you at your job? Do you feel it’s stable? I was in the same predicament as you. My wife and I both owed about $50K student loans. We had lower interest rates, but the crooks called Mohela bought out our student loans and jacked up our interest rates to close to 8%. I’m pretty sure that’s illegal, but what can you do? We were paying a good $4,000+ IN INTEREST ALONE per year!
So, I took out a 401K loan and paid off that sucker. I’m currently paying my 401K loan back, and the interest (like 4%), goes right back into my 401K! Student loan interest deduction you say? I wrote a complicated Excel program that calculates taxes down to just a few dollars (due to the IRS using tax tables and me using formulas). It’s got everything you can imagine, almost any scenario, all sorts of deductions, itemized, self-employment, etc. Heck, it even tracks my expenses so I know exactly what I’m spending. It confirms I don’t save a whole lot with student loan deductions, which is what helped me make that decide to take out a 401K loan. The “lost gain” is made up by not having to pay ridiculous interest + 401K loan payment goes back to me. Plus, married, you get penalized and the max you can deduct is $2,500. Anyways, I started doing insane overtime (15+ hours), which brings me into the 6 figure level. At this rate, I’ll pay off ALL my debt in 2 years, and then it’ll be like $40K+ after-tax all free, AFTER all expenses are paid. I am maxing out 401K at the same time and maxing out a Roth IRA too. Once my income is free, I’m going to split my contribution half into a Roth 401K (which thankfully my work also offers).
I also created a super duper cool Excel tool that does all my 401K/IRA calculations, including inflation, median household income, different rates of return, projections etc. Everything. It’s super cool and has helped me get my financial bearings back.
Just a thought. Good luck my friend.
BTW, you MUST do at least 15% or more into 401K, and max out a Roth IRA. You will thank me later, trust me. IRS Required Minimum Distributions don’t apply to Roth IRAs, and it’s what the rich bastards use to transfer money to their kids, tax free. When you do thank me (not if, but when), please remember I accept donations *wink*
Hey Sam,
25 years old and I am about to graduate from grad school. After 6 months I will enter repayment on my loans. Because I chose to work full-time while going to school full-time, my salary bumped me out of any subsidized loans/need-based scholarships etc. I am looking at $40,000 in loans with a federal interest rate of 5.6%. My question is that I have maxed out my 401k for the past 3 years I have been working (18% of income), I bought a home, paid off a car in full, and currently contribute 6% (at 3%/100% company match) into our company stock purchase plan. Would you recommend reducing 401k contribution to pay off student loans, leasing home out and renting apartment to have some secondary income, or just significant lifestyle cuts?
Hi Shelby,
Nice job maxing out your 401k these past three years. I say KEEP IT UP, forever!
An interest rate at 5.6% is relatively high. I’d follow my FS-DAIR methodology of paying down debt. Check it out.
Also, you should read this post on housing expenses for financial independence to lock down lifestyle expenses.
I think it’s a massive oversight to not reccomend a Roth IRA before an employer 401k. Obviously if you are lucky enough to get a good match then do that first buy Roth IRA for you and spouse should be maxed before 1 more dime goes into an employer plan. The fees in these plans will eat you alive especially as your balance grows. These plans have high fees with a lot less flexibility than a Roth IRA as far as what you can buy. Vanguard Roth IRA doesn’t have fees or even trade commissions if you buy their funds which are generally the most respected in the world for the low expense ratios. Employer plans are generally terrible.
Husband – 52 yrs old – 430K in 401K – planning to work until 65
Myself – 46 yrs old – 585k in 401k – planning to retire in 6-7 years
No pension plan.
800K equity on home
230K saved to fund my daughter’s college
150K ESPP
Emergency funds – 70K
Will we be able to retire comfortably? We are First generation immigrants to this country. So no clue how much is needed for retirement and we haven’t seen any family members retiring yet.
Regards.
$150k in company stock? You need to diversify. I’m always surprised by how many people at work just let company stock pile up.
Hi Seethalu,
First of all congrats on the good job. Let’s break this down:
As of the time you wrote the artice:
Husband 52 and has 430k in 401k
Wife 46 and has 585k in 401k
You don’t list other factors such as income, insurance brokerage accounts etc… If your husband works until age 65 and maxes out his 401k and these calculations assume no company match and a modest 8% annual return the balance will be 1,641,335.82 at the time of his retirement. You should be able to safely withdrawl 90k from that account without running out of money.
You mentioned you are retiring in 6-7 years. Here is my calculations for you:
Assuming you max out your 401k and get no company match you will have 1,268,793.77 in 7 years at age 53. If you let it sit there until you turn 59.5 and it earns a modest 6% return your balance will be 1,817,055.27 and you will safely be able to withdrawl 80k per year without risking running out of money.
That will bring you and your husband to a combined income of about 175k per year without factoring social security, the ESPP or home equity. You can always downsize to a smaller house and tap some of that equity. You are on the right track, congrats!