How Much Should I Have In My 401(k) At My Age?

How much should you have in your 401(k) at your age? The answer is simple, yet complicated. Confused yet? Let’s dive in!

There are loads of mysterious questions in life:

  • Why are we here?
  • Is the universe finite or infinite?
  • Why does obnoxious Uncle Larry have to get drunk and spoil every holiday (and why do we keep inviting him?)
  • How much should I have in my 401(k)?

I’m sorry to report that I don’t have an answer for the first three questions. However, I can help you out with 401(k)s.

Why the 401(k)?

Long term readers know that I’m completely and totally obsessed with 401(k)s. At the tender age of 42, I have over $500,000 in my 401(k) accounts (I’ll reveal my actual number in a moment).

They are wonderful for two main reasons:

  • 401(k)s help you reduce your tax bill. Every dollar you invest in your 401(k) is a dollar that you don’t have to pay taxes on. If you’re single and make $75,000 per year, contributing $10,000 to your 401(k) saves you $2,500 in taxes. Contribute the maximum $18,000 and you’ve saved $4,500. And that is just for one year! Think of the money you’ll save over decades.
  • Your employer is giving you free money. In many cases, your employer will match part of your contribution. Free money! If you aren’t contributing, you are turning down money that someone wants to give you. Ridiculous!

There are many other reasons why a 401(k) is worthwhile. For a full run down, see my recent post on the matter.

What is the average 401(k) balance?

Before I tell you how much you should have in your 401(k), it’s a worthwhile exercise to see how much others have saved. I borrowed this chart from my friend Sam over at Financial Samurai:

how much do people contribute to their 401(k) on average

Observations

  • I’m killing it! The first thing I did was compare my wife and I to these numbers. I’m close to 40 and according to the chart, an average person my age has between $100,000 and $150,000 in their account. I have about $500,000 in my account and my wife has $225,000 in hers. We are both way above average.
  • But, we could have done much better: Neither my wife nor I have maxed out our accounts in all years. Part of this was a silly mistake on my part. When markets were crashing during the Great Recession, I dialed back my contributions when I should have been doing the opposite.
  • Welcome to Walmart! The most painful fact on the chart is that the average 65 year old only has between $400,000 and $800,000 in their retirement account. According to U.S. News, those numbers are wildly optimistic. If you’re 65 and have $400,000 in your 401(k) with no other retirement savings, you better not plan on quitting any time soon. I hear Walmart is hiring. Repeat after me: “Welcome to Walmart!”

How much should I have in my 401(k)?

At this point you’re probably wondering, “so just how much should I contribute to my 401(k)”? What’s the magic formula?

Figuring out how much you should put in your 401(k) is quite simple. It’s also complicated.

Confused yet? Let’s get right to it. Here is how much you should have:

You should have as much as you possibly can in your 401(k) account! Click To Tweet

If you’ve ever wondered “should I max out my 401(k)”, the answer is probably yes!

Allow me to elaborate. Retirement isn’t what it used to be:

  • The era of the pension is largely over. Your company no longer feels that it’s their responsibility to see that you have a nice, comfortable retirement. For most, there will be no safe and steady income stream courtesy of the cube farm you spent the last 40 years slaving away in. You probably won’t get a gold watch either. The best you can hope for is that you leave on our own terms and in good health.
  • Social Security will be there, but… Social Security is a sacred cow that no politician in their right mind would let die. Seniors vote in force. However, don’t expect to get the same money from it at the same age that your parents did. As Uncle Sam struggles to make ends meet, entitlement programs will be modified. These modifications will not be in your favor. Retirement ages will go up. At the same time, those payments will go down.
  • You will live longer. I have some good news and some bad news for you. The good news is that you will probably live longer than your parents. Modern sanitation and medicine will see to it. The bad news is that you will probably live longer than your parents. Yes, this is good and bad. No one wants to die before their time, but it costs money to live. The longer you live, the more money you need.

What you should do

I just gave you some awful news. Now, let’s talk about how to fix it.

Your 401(k) can solve your retirement problem. Embrace it. Live it. Love it. Most importantly, shove every cent you can into it.

  • Are you thinking of buying a new car? Not a chance buddy unless you’ve already maxed out your 401(k).
  • Thinking of moving to a swell home in the suburbs? Not unless you’ve given Mr. 401(k) his full contribution for the year and the new house won’t prohibit you from doing so in the future.

The power of saving regularly cannot be underestimated. To illustrate, let’s look at a little scenario. Saver Sheila is 25 and does the following:

  • Saves $12,000 per year. Sheila can’t afford to max out her 401(k), so she puts $12,000 in it every year.
  • Saves for 30 years. This comes out to a total of $360,000 in contributions.
  • Earns an average of 7% per year. This is a modest return.

Just 30 years later, Sheila is a millionaire and then some!

Screen Shot 2016-05-15 at 6.54.10 PM

Sheila’s 401(k) has been hard at work, more than tripling her money. Sheila won’t have to work at Walmart to make ends meet. Sheila will have a good retirement thanks to Mr. 401(k).

Allow me to elaborate on my advice. It really cannot be understated how important this is:

You should have as much as you possibly can in your 401(k) account! Try as hard as you can to max it out. If you cannot do that, at least put enough money into it to get your full employer match.

Don’t worry if your fund choices are not the best. Statistics show that you’ll probably switch jobs at least a couple times before you retire. At that time, you can roll over into a low fee provider. In the meantime, you’ll be getting the tax savings from your contributions.

A Note On Uncovering Hidden 401(k) Fees

If you are worried about paying too many fees in your 401(k), you can always use Personal Capital’s free 401k fee analyzer to uncover hidden fees in your portfolio.

When I first ran the Fee Analyzer against my own portfolio, I nearly fell out of my chair. It told me that I’d pay $594,993 in fees over the next 26 years:

before

I moved my investments around and reduced my potential fees to less than $100,000:

after

I’d highly recommend signing up for a FREE account at Personal Capital to take advantage of their 401k analyzer. It might just save you $500,000 dollars (or more).

Watch As Your 401(k) Snowballs

Now that you’re contributing as much as you can, sit back and watch as that 401(k) balance snowballs.

That snowball will allow you to be at peace with your finances. Never forget that the best part of having a big pile of money is that it frees you from having to worry about money.

Did I mention how great 401(k)s are?

Mr. 1500 loves to write about personal finance, early retirement and anything else that has to do with money. When not thinking about numbers and dollar signs, you can find him with his family playing in the beautiful outdoors of Colorado

17 Comments

  1. Grant Bledsoe

    May 23, 2016 at 6:31 pm

    This is a great post. Future generations will need to rely mostly on their own assets to draw income in retirement, and the 401k is one of the best ways to build wealth.

    Even though many 401k plans (especially in smaller businesses) include egregious fees, their tax advantages cannot be beat.

    • Mr. 1500

      May 24, 2016 at 11:32 pm

      Exactly! Even if there are big fees and the choices suck, you’re still saving loads on taxes. Just roll the thing over when you quit; problem solved!

  2. Daniel

    May 24, 2016 at 11:03 am

    I am right about on par with you on 401k (the U.S. News report is just scary to me). I also have a secret weapon as I also have a pension fund (that if I work to 62 will pay out 40% of my current salary (so basically worth between having 1.2-1.5 million at the 4% rule)). My new concern, if the market moves at a reasonable rate is that when I start hitting the RMD I am going to get whalloped by taxes on my withdrawals)..

    • Mr. 1500

      May 24, 2016 at 11:33 pm

      No one enjoys paying taxes, but your problem is a good one to have!

  3. Xyz from Financial Path.

    June 13, 2016 at 4:24 pm

    with the decline of define benefit plans, we don’t have any choice now!

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  5. The Jolly Ledger

    June 14, 2016 at 9:14 am

    I am only disappointed that we can’t save more than $18,000 per year!

    • YYZ

      June 14, 2016 at 4:35 pm

      You might also be able to add to a Roth IRA, depending on how much you make. And if you still have extra, go for a regular brokerage account that has low cost index funds. Neither one will reduce your income tax today, but you’ll pay much less in tax when you withdraw.

      If your employer offers a High Deductable Health Plan you can also contribute to an HSA, much the same way you contribute to 401k. I max that out as well, and DON’T use it for health expenses….let it grow. (not using it now, also makes it alot easier to fill out the forms at tax time).

      • Han Chang

        Han Chang

        June 14, 2016 at 6:14 pm

        Yup, great point about the HSA – I use that trick too since not many people know it basically acts as another Traditional IRA, in that you can actually use the funds to invest so it doesn’t have to just sit as cash. Check out https://personal.vanguard.com/us/whatweoffer/overview/healthsavings for more info. Thanks for the tip!

    • 13yeargoal

      June 14, 2016 at 11:39 pm

      You can if your plan allows for after tax contributions! You can then mega-back-door the after tax into a Roth IRA

      • Steve

        June 21, 2016 at 7:59 pm

        If you don’t qualify for a ROTH IRA contribution you can always make an after tax IRA contribution and covert it to a ROTH the next day.

  6. FI Champion

    June 15, 2016 at 9:47 pm

    Mr. 1500,

    On your Sheila example…..inflation will erode the spending power of that money. So even though it is $1.2 million after her 30 years of saving, I calculate that to be equivalent to about $500,000 in today’s dollars. I used a 3% inflation rate.

    Now I definitely get your point that you should save as much as possible. And I definitely agree with it wholeheartedly. I also know you used only 7% for the rate of return on her investments. That could likely be higher and then her situation ends up better. But I just wanted to make sure we included inflation into consideration. She may be hard-pressed to retire 100% with the spending power of only $500,000.

    • Mr. 1500

      June 29, 2016 at 12:17 pm

      Everything you say is true, but there are a couple other things to consider beyond my conservative 7% return: She didn’t max it out and also received no employer match. Most employers do offer a match and if you can afford to put more than 12K per year in, you’ll be riding high

  7. Investment Hunting

    June 16, 2016 at 11:08 am

    Thanks for writing this post. I agree with almost everything here, except for my taste, I’d max out my Roth 401k instead. Employers will only match to your pre-tax 401k. So buy contributing to a Roth 401k, you end up with two portfolios, one pre-tax and the other post-tax.

    • Han Chang

      Han Chang

      June 16, 2016 at 11:36 am

      Yeah, good point – it all depends on how much tax you think you’ll be paying when you retire. Most people will be paying less tax when they retire since their earnings will be lower, so maxing the 401k makes more sense for them, but if you think you’ll be making as much (if not more) in retirement due to business or whatever then the Roth is the way to go!

    • Mr. 1500

      June 29, 2016 at 12:20 pm

      Han/InvestmentHunting: Great points! I’m in a high tax bracket, so I choose the regular 401(k) to save money on income taxes. As Han mentioned, I believe that I’ll be in a lower bracket when I retire, even if taxes go up (which I think they will).

      In my experience, Roth 401(k)s are rare too. Hopefully, they catch on.

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