A 401(k) can be a great way to save for retirement on a pre-tax basis, while enjoying the added benefit of an employer match. But it can be hard to know if you’re saving enough. You might be wondering, How much should I have in my 401(k) at 30? A common rule of thumb is to have at least one year’s salary saved in your 401(k) by the time you turn 30.
Your actual 401(k) balance, however, may be higher or lower depending on when you started saving, how much of your salary you defer into the plan, and the amount your employer matches. We’ll break down the average target balance for workers from age 25 to 65, and what to do if you’re not quite hitting that goal.
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How Much You Ideally Have Saved for Retirement
It’s never too early to ask “am I on track for retirement?” The sooner you do, the more time you’ll have to catch up if you’re falling short. Just know that the answer can be a moving target, depending on a number of variables.
First of all, your retirement savings objective will depend largely on your retirement goals. Someone who wants to retire at 50 is going to need a much larger nest egg by age 30 than someone who plans to wait until age 70 to retire.
Many other factors also come into play. By way of example, let’s calculate the 401(k) savings for one 30-year-old professional woman. Retirement experts often recommend saving 10% to 15% of your income in a workplace retirement plan each year. Following that advice, our hypothetical saver:
- starts contributing to her plan at age 25.
- defers 10% of her $60,000 salary annually for five years.
- earns a 7% annual rate of return — a pretty average rate of return on 401(k) investments.
- benefits from an employer match of 50% of contributions, up to 6% of her salary.
By age 30, our professional would have $46,539 saved in her 401(k). This is a great start. However, you can see how her balance might be significantly higher or lower if we changed up one or more details. For instance, by contributing 15% of her pay instead, she’d have $64,439 on her Big 3-0. On the other hand, if she started saving later, earned a lower rate of return, or enjoyed a less generous employer match, her balance could be lower.
Bottom line? How much you should have saved in a 401(k) by age 30 (or any other age) is subjective. It varies based on where you’re starting from and how aggressively you’re saving each year.
How Much Do You Need to Retire
While you might hear financial experts say that you need $1 million or even $2 million to enjoy a comfortable retirement, that’s a guideline rather than a set-in-stone number. The amount you’ll need to retire can depend on:
- How long you plan to continue working
- When you anticipate taking Social Security benefits
- Your desired lifestyle in retirement
- How much you expect to spend on basic living expenses in retirement
- Whether you have a spouse or partner
- Whether you anticipate needing long-term care at some point
Assessing your personal retirement goals can help you come up with a realistic number that you should be targeting. It’s also helpful to consider how things like changing health care needs, increases (or cuts) to Social Security and Medicare, and inflation may impact the dollar amount you need to save and invest to avoid falling short in retirement.
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Average and Median 401(k) Balance by Age
Looking at the average savings by age can give you some idea of whether you’re on track. Just keep in mind that your progress and savings should match up with your specific goals.
Using a chart like this can make it easier to see where you are on the savings spectrum. So if you’re wondering “how much should I have saved by 40?,” for example, you can see at a glance that the average 40-something has close to $100,000 in retirement savings.
Remember that average numbers reflect outlier highs and lows, while the median represents where people in the middle of the pack land. Between them, median can be a more accurate or reliable number to measure yourself against.
Tips to Save for Retirement
Enrolling in your 401(k) is one of the easiest ways to begin building retirement savings. Your employer may have enrolled you automatically when you were hired. If you’re not sure, contact your HR department. You can also check your default contribution rate to see how much you’re contributing to the plan.
It’s a good idea to contribute at least enough to get the full company match if one is offered. Otherwise, you’re leaving free money on the table.
If you’re worried you’re not saving enough, consider supplementing your 401(k) with an Individual Retirement Account (IRA).
An IRA is another tax-advantaged savings option. You can open a traditional IRA, which offers the benefit of tax-deductible contributions, or a Roth IRA. With a Roth IRA, you can’t deduct contributions, but qualified withdrawals are 100% tax-free.
Not sure how to start a retirement fund? It’s actually easy to do through an online brokerage. You can create an account, choose which type of IRA you want to open, and set up automatic contributions to start building wealth.
How Much Should You Contribute to Your 401(k) Per Year
The amount you should contribute to your 401(k) each year should reflect your retirement savings goal, how many years you have to save, and your expected annual rate of return.
When deciding how much to save, first consider your budget and how much of your income you can commit to your 401(k). Next, look at the amount you need to contribute to get the full company match. You can then plug those numbers, along with your salary, into a 401(k) calculator to get an idea of how likely you are to hit your retirement savings goal.
For instance, you might figure out that you need to save 15% of your pay each year. But if you’re not making a lot yet, you might only be able to afford saving 8% each year. So what do you do then? A simple solution is to increase your contribution amount each year and work your way up to the 15% threshold gradually.
Example of Impact of Compounding Interest on Retirement
Does it matter when you start saving for retirement? Yes, and in a big way, thanks to compounding interest. Compound interest is the interest you earn on your interest. The longer you have to save and invest, the better. In fact, the best way to build wealth in your 30s is simply to continue contributing what you can to your retirement savings, and then let it sit there for a few decades.
Going back to the 401(k) example mentioned at the beginning, someone who starts saving 10% of their pay at age 25 and earns a steady 7% rate of return would have just over $1.6 million saved for retirement by age 65. That assumes they earn the same $60,000 throughout their career. If they were to get a 2% annual raise, their 401(k) balance would be over $2 million by the time they retire.
Now, assume that same person waits until age 35 to start saving. Even with a 2% annual raise, they’d have just $938,897 saved by age 65. That’s still a decent chunk of money, but it’s far less than they would have had if they’d gotten an earlier start. This example illustrates how powerful compounding interest can be when determining how much you’ll end up with in retirement.
Don’t Panic If You’re Behind on Saving
Having a lot of money in your 401(k) by age 30 is great, but don’t feel bad if you’re not where you need to be. Instead of fretting over what you haven’t saved, focus on what you can do next to increase your savings efforts.
That can mean:
- Increasing your 401(k) contribution rate
- Opening an IRA to go along with your 401(k)
- Choosing low-cost investments to minimize fees
- Investing through a taxable brokerage account
What if you have no money to invest? In that case, you might need to go back to basics. Getting on a budget, for example, can help you rein in overspending and find the extra money that you need to save. A free budget app is a simple and effective way to keep tabs on spending and saving.
The Takeaway
How much you should have in your 401(k) at 30 isn’t a simple number that applies to everyone. Your savings goal depends on a number of factors, such as your anticipated retirement age, when you started saving, your rate of return, and so on. Many retirement experts recommend saving 10% to 15% of your salary in a tax-advantaged retirement plan. From there, compounding interest over a long period of time will multiply your earnings. The bottom line is to save as much as you comfortably can.
FAQ
What is the average 401(k) balance for a 35-year-old?
The average 401(k) balance for a 35-year-old is $97,020, according to Vanguard’s How America Saves report. Average 401(k) balances are typically higher than median 401(k) balances across all age groups, as they reflect higher and lower outliers.
How much will a 401(k) grow in 20 years on average?
The amount that a 401(k) will grow over a 20-year period can depend on how much someone contributes to the plan annually, how much of that contribution their employer matches, and their average rate of return. Someone who saves consistently, increases their contribution rate annually, and chooses investments that perform well will likely see more growth than someone who saves only the bare minimum or hands back a chunk of their returns in 401(k) fees.
What is a good 401(k) balance at age 30?
A good 401(k) balance by age 30 is at least one year’s worth of salary. So if you make $75,000 a year you’d ideally want to have $75,000 in your retirement account. Whether that number is realistic for you can depend on how much you earn, when you started saving in your 401(k), and your rate of return.
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8 smart ways to boost your retirement savings
Saving money in your company’s retirement plan is one of the easiest ways to invest in your future. The money automatically comes out of your paycheck and is invested on a regular basis. Some people even have the benefit of an employer match that can help them max out a 401(k)’s potential. But did you know there are also some 401(k) hacks that can boost your retirement savings even more?
Follow along to learn some of the little-known ways you can save more money, earn higher returns by making some savvy money moves and reach your retirement goals quicker.
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Company retirement plans typically offer a handful of mutual funds and other investments to choose from. When you first sign up for your company’s 401(k) retirement plan, if you don’t make a choice, your money will be invested in a default option. Depending upon your company’s policies, this usually means a money market, stable value, or target-date fund.
So what’s the 401(k) hack? To reach your retirement goals, you’ll want to personalize where your 401(k) contributions are being invested. Factors to think about include your tolerance for risk, time frame for retirement and the available investment options.
As you reviewing your investment choices, think about these details:
- Look at the expense ratio of each fund. The expense ratio is how much the fund manager charges to manage that investment. The lower this number is, the better. Funds that track an index typically charge less than funds with a manager who manually researches and selects stocks.
- Avoid focusing on past returns. Historical returns show how an investment has performed over time. These returns may factor into your decision, but remember they do not guarantee future performance.
- What does it invest in? Don’t pick multiple investments that invest in the same stocks and bonds. Instead, pick a diverse portfolio with different types of stocks and bonds from both the U.S. and foreign countries.
If your company’s retirement plan is filled with investment choices that have high expense ratios, speak with your human resources department or manager. Request that they review the plan and consider finding a new plan sponsor. You may even share some low-cost index fund alternatives like Vanguard or Fidelity for them to consider.
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As you change jobs throughout your career, you may be leaving something valuable behind with each move — your old 401(k) account at your old job. It makes sense to move this money as quickly as possible so a few things don’t happen:
- The old employer cashes out the 401(k) account and mails you a check or moves the money to an IRA of its choosing (if less than $5,000)
- The money is forgotten about and transferred to the state
- Your heirs never know about the money
- The money is not factored into progress toward your retirement goals
When you leave a job, you have several options for what you can do with your old 401(k):
- Roll over the 401(k) into an IRA. Doing a 401(k) to IRA rollover is a popular choice because you have more control over which company you choose to work with and your investment options.
- Transfer the 401(k) into your new employer’s plan. Transferring into your new 401(k) makes your savings easier to monitor because all your funds are in one account. Company retirement plans also offer more protection from creditors than IRAs.
- Leave it in your old company’s plan. Some companies do not allow low-balance accounts to remain in their plans, and they may either issue you a check or roll over the funds into an IRA of their choosing, so this may not be an option.
- Cash out the balance. This can have devastating impacts on your retirement savings because you’ll lose out on the opportunity to earn tax-deferred gains between now and your retirement age. You’ll also pay taxes on the money plus a 10% early withdrawal penalty.
When transferring to your new 401(k) or rolling over to an IRA, it is best to have your old 401(k) send the money directly to your new retirement account. If the money is sent to you, it could trigger taxes and penalties depending on how the check is written and how long you hold onto the money.
jacoblund/istockphoto
A lot of people don’t make enough money to max out their retirement accounts when they first start investing. Instead, they start out with a small retirement plan contribution. They mean to increase it, but often forget as work and personal life responsibilities take center stage.
An easy hack is to increase your 401(k) contribution every year when you get your raise. You won’t miss this extra money because it was never in your paycheck to begin with. Over the course of several years, you’ll get closer to maxing out your retirement account while putting away larger and larger amounts of money for your future.
For example, if you get a 3% raise, consider increasing your 401(k) contribution by 1% or 2%. Because so many other bills don’t increase every year, like your mortgage or auto payment, investing a portion of your raise is easier to do.
One way to automate this process is to sign up for the auto-escalation of retirement contributions. Not all 401(k) plans offer this, so check with your HR department or manager to find out. Auto-escalation increases your retirement plan contributions automatically so you don’t have to remember.
If your company does not offer auto-escalation, set a calendar reminder for your pay raise date so you can manually make the change.
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Investment returns vary from year to year for each type of investment. When you have a mix of investments in your account, this can change the composition of your portfolio from what you intended. But you chose the composition of your portfolio because it would help you best reach your financial goals. So to bring your account back into alignment, you should do what’s known as a rebalance every so often.
When you rebalance, you sell some of the investments that went up in value, while buying more of those that went down. The image above is what it looks like when a portfolio goes out of alignment and then how a rebalance can fix things.
Two popular strategies to consider when rebalancing:
- Rebalance once a year (e.g., on your birthday)
- Rebalance when an asset’s allocation changes by more than 5% (e.g., from 50% to 55% of your total account balance)
Pick one of these strategies and make the rebalancing hack a regular part of your 401(k) maintenance.
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Current IRS rules allow for people under 50 years old to contribute $19,500 per year to their 401(k) plan. People 50 and over can contribute another $6,500 per year, for a total of $26,000.
If you are able to save more than these amounts, consider fully funding an IRA account. You can choose a traditional IRA for the tax-deduction or a Roth IRA for tax-free money in retirement. The maximum contribution to an IRA is $6,000 per year (plus $1,000 if over age 50).
But what about those who are unable to contribute fully to an IRA or who want to invest even more money?
It is possible to contribute even more money to your 401(k) plan as after-tax contributions, even if you have a traditional 401(k) vs. a Roth 401(k). The combined 401(k) contribution limit for 2020 is $57,000 (or 100% of your compensation, whichever is lower).
To calculate your after-tax contribution, subtract these amounts from the $57,000 limit:
- Your total 401(k) contributions from your paycheck (maximum of $19,500 or $26,000 for investors aged 50 or over)
- Your total employer match amount
The amount remaining is the maximum after-tax contribution that you can make. This is a maximum, so you can always contribute less.
After-tax contributions can be withdrawn at any time without paying taxes or penalties. However, any earnings are considered pre-tax balances, so there are taxes owed on withdrawals of earnings. You must withdraw earnings when withdrawing after-tax contributions, so there will be some taxes owed on withdrawals. Consider this when you do your tax planning for your retirement years.
Your after-tax contributions can also be converted into a Roth IRA. This allows your after-tax contributions to grow tax-deferred and withdrawals to be tax-free. You may have to wait until after you leave your job to do this because not all companies allow in-service 401(k) conversions.
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For investors with a side hustle, opening a solo 401(k) is a great hack, especially if you don’t have a company retirement plan at your day job. These accounts allow the self-employed and small business owners with no employees to set aside a portion of their business profits. If you are under 50 years old, you can contribute up to $19,500 from your salary, plus the company can contribute up to 25% of your compensation.
For example, if you are under 50 years old and earn $50,000 in wages from your business, you can contribute $19,500, and the company can contribute another $12,500. This results in a total solo 401(k) contribution of $32,000 for the year. If you are older than 50, you are allowed an additional catch-up contribution of $6,500.
You can set up a solo 401(k) at investment firms like Vanguard and Fidelity, and if you have a 401(k) from your employer, you can still have a solo 401(k). There are contribution limits on a solo 401(k), and the contributions from both your employer’s plan and your solo plan will count toward your annual maximum.
Anchiy
Reaching the age of 65 is usually the target for retirement. However, the FIRE movement (financial independence, retire early) is gaining in popularity and many now aspire to achieve early retirement. Usually, retirees are required to wait until they reach 59 1/2 before they can start to withdraw from retirement accounts and avoid penalties. However, there is a hack to access your 401(k) retirement account early without incurring a penalty. It is based on Internal Revenue Code and is known as the Rule of 55.
The Rule of 55 allows workers who leave their job during the year they turn 55 years of age or older to withdraw money from their 401(k) accounts without a penalty. No matter the reason for leaving your job — if you quit, got fired, or were laid off — as long as you meet the age requirement, you are good. Even better people who are qualified safety employees for the federal, state, or local government may start making penalty-free withdrawals at age 50.
Keep in mind that the Rule of 55 doesn’t apply to all retirement accounts. It applies only to the 401(k) at the employer you are leaving. For this reason, it may make sense to roll over your old 401(k) accounts into your current employer account in order to have more funds available.
Although you can take advantage of the Rule of 55, it may not make sense to. With the average life expectancy being almost 79 years in the U.S., you should allow your tax-deferred retirement accounts to grow for as long as possible. You may want to withdraw money from your taxable brokerage account or have other income sources, such as real estate investments, to pay your bills while waiting for the traditional retirement age.
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When people think about financial advisors, they usually think about their IRAs and brokerage accounts. Financial advisors typically don’t manage your 401(k), but they can still provide advice on investment selection. This advice could help you avoid costly retirement mistakes.
If you think about it, an advisor should want to help you with your company retirement plan, even if they aren’t getting paid for it. The bigger those assets grow, the larger the investment opportunity will be when you leave your job or retire.
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Saving for retirement can be a daunting task. It makes sense to contribute as much as you can to retirement accounts like a 401(k) every year. Even if you can’t max them out right away, start small and increase your contributions every year to maximize these tax-advantaged retirement accounts. Follow the steps above to increase your savings rates, boost your returns, and manage your accounts better.
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This article originally appeared on FinanceBuzz.com and was syndicated by MediaFeed.org.
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