How Much Should Be In My 401(k)?

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InvestorMint provides personal finance tools and insights to better inform your financial decisions. Our research is comprehensive, independent and well researched so you can have greater confidence in your financial choices. Figuring out how much should be in your 401(k) could quickly cause you to start scratching your head. Factoring in life expectancy, inflation, spending, income and earnings is no mean feat.

But it can be simplified quite easily when you step back and look at the big picture plan you have for retirement. The goal of retirement for most people is to maintain at least the same standard of living enjoyed during their working careers.

So, if you earn $50,000 as an employee, you will want to estimate how many years you expect to enjoy retirement and multiply it by $50,000.

To keep the math simple for now, you could estimate that a 30 year retirement period would require $1,500,000 in savings ($50,000 x 30 years).

This easy calculation allows us to put a stake in the ground, but alas, it’s not quite that simple. We will need to factor in a few other items to get a more accurate projection of how much should be in your 401(k).

How Much Should Be In My
401(k) After Factoring In Inflation?

The straightforward analysis above ignores the impact of inflation, which is significant. But it does at least allow you to estimate the very minimum amount you will need excluding increases in the costs of goods and rising prices due to inflation.

Inflation is defined as the general increases in prices and loss in purchasing power as time goes by.

Most people think of inflation as prices rising, but there is more to inflation than meets the eye, literally!

How to Spot Inflation When Prices Don’t Rise

When you go to the store and buy a pack of chips these days, you may reminisce fondly on how much cheaper it was when you were a few decades younger.

But inflation has a more sinister way of creeping into your life.

For example, a sneaky trick cereal manufacturers learned long ago is to charge you the same amount this year as last year for a box of cereal, so it seems like the price did not rise.

The trick is that they sometimes reduce the amount of food inside the box.

In essence, you are paying more this year for the same amount you bought last year – it’s just not so obvious because you don’t see it affect your wallet right away.

What Is The Average Rate Of Inflation?

According to InflationData.com, the average annual inflation rate has been 3.22%.

The number seems so small that it could almost be ignored – until you realize that the compounded effect of this seemingly small annual increase is for prices to double every 20 years!

If you are 45 years old and plan to retire at age 65, then inflation will eat up half your purchasing power over that time frame. That means if you require $50,000 to live today, you will need $100,000 in 20 years to live the same lifestyle.

So, in our example, a 30 year retirement requires not just $1,500,000 but $3,000,000 to live a similar lifestyle as today – yikes!

But can you save that much when restricted by 401(k) contribution limits?

How Much Should Be In My
401(k) With Contribution Limits?

The most you are permitted to contribute to a 401(k) each year when under the age of 50 is $19,000 and $25,000 when aged 50 or older.

If you are 45 years of age, and max out savings for the next 20 years, the total principal contribution you could make is $470,000 (5 years * $19,000 + 15 years * $25,000).

Generally, the limit increases regularly so if you max out contributions, the total may end up being closer to $500,000 or more.

But both of these numbers are a long way from $3,000,000. So what can you do?

>> Related: 401(k) or IRA: Which Is Better?

How To Increase Your 401k:
Max Out 401(k) Employer Matching

If you are working for an employer who matches your 401(k) contributions already, it is financially wise take full advantage of this benefit.

At the low-end, the 45 year old employee in the example above can save $470,000 if they max out 401(k) contributions, and perhaps they can contribute closer to $500,000 or more if limits continue to rise.

When your employer matches your 401(k) contributions, you basically get ‘free’ money.

Every dollar you contribute, your employer contributes one dollar also. Some employers will match a lower amount, say 50% of each dollar you contribute. Whatever the % contribution match, it’s money you otherwise wouldn’t have in your pocket.

By 65, the employee who takes advantage of a 1:1 matching employee 401(k) contribution program has an extra $450,000 → $500,000+ in their nest-egg!

But that’s not where it ends, it gets better…


➤ Free Guide: 5 Ways To Automate Your Retirement


How Much Should Be In My
401(k) If I Earn 7% Annually?

The amount you have at retirement is not just the principal you invest but also includes the earnings on investments.

The average annual return of the stock market from 1950 to 2009 when factoring in inflation and dividends was 7.0%.

Now here’s where the power of compounding comes to your rescue.

In year 1, if you max out your contributions of $19,000, your principal will turn into $73,524 after 20 years growing at an average annual rate of 7%.

The key is to start investing earlier. The difference between 19 years of growth and 20 years of growth is almost $5,000!

Every year you delay investing, you lose out on the power of compounding working in your favor.

It turns out that investing $19,000 each year for the next 20 years and earning 7% per year on average results in a nest-egg of almost $1,000,000!

With employer matching, that’s closer to $2 million!

And those amounts are even higher for the employee over age 50 who gets to contribute $25,000 annually.

Keep Portfolio
Management Fees and
Fund Fees Low

What is even more interesting is how your 401(k) grows with and without fees.

If you invest your money in actively managed mutual funds that have high expense ratios, your portfolio may end up hundreds of thousands of dollars lower than if you avoid high fees.

Let’s imagine you pay a financial advisor 1.25% each year and pay 0.75% in expense ratios to your mutual fund managers on average, for a total fee cost annually of 2%.

It turns out that 30 years later, you end up with $550,338 when you start with $100,000 compared to your non-fee paying neighbor, who ends up with $1,006,266.

Expense Ratio
YearAnnual Gain (8%)0.50%1.00%1.50%2.00%
0$100,000$100,000$100,000$100,000$100,000
1$108,000$107,500$107,000$106,500$106,000
2$116,640$115,560$114,485$113,415$112,350
3$125,971$124,222$122,488$120,771$119,070
4$136,049$133,529$131,045$128,595$126,180
5$146,933$143,532$140,193$136,917$133,702
6$158,687$154,279$149,974$145,768$141,660
7$171,382$165,828$160,429$155,180$150,078
8$185,093$178,238$171,605$165,187$158,980
9$199,900$191,571$183,551$175,828$168,395
10$215,892$205,897$196,319$187,141$178,350
11$233,164$221,290$209,965$199,168$188,875
12$251,817$237,827$224,550$211,952$200,002
13$271,962$255,594$240,136$225,540$211,763
14$293,719$274,682$256,790$239,981$224,193
15$317,217$295,188$274,587$255,328$237,329
16$342,594$317,217$293,602$271,635$251,209
17$370,002$340,881$313,918$288,962$265,873
18$399,602$366,302$335,622$307,370$281,363
19$431,570$393,608$358,809$326,925$297,725
20$466,096$422,939$383,578$347,697$315,004
21$503,383$454,443$410,035$369,759$333,251
22$543,654$488,282$438,293$393,189$352,516
23$587,146$524,626$468,474$418,070$372,853
24$634,118$563,661$500,705$444,489$394,320
25$684,848$605,583$535,125$472,537$416,976
26$739,635$650,605$571,879$502,313$440,883
27$798,806$698,955$611,124$533,920$466,108
28$862,711$750,878$653,024$567,467$492,718
29$931,727$806,634$697,757$603,069$520,786
30$1,006,266$866,507$745,511$640,848$550,388

By paying seemingly small fees of just 2% each year, the power of compounding hurts your retirement nest-egg very significantly; you end up with just over half what you would have if you had paid no fees.

Most 401(k) plans are quite restrictive and require you to invest in only a certain limited range of mutual funds.

But when you move on to another employer, you have flexibility to rollover your 401(k) into an IRA, and invest your retirement portfolio in a much broader range of lower fee exchange-traded funds, or ETFs.

>> Related – Should I Choose A Traditional IRA or Roth IRA?

The Amount You Need Is Lower if You Receive Social Security

About 62 million people in the United States receive benefits from the Social Security Administration SSA). According to SSA, 80% of those people are retired workers, dependents, and aged widows.

If you qualify for SSA benefits, then you don’t need to invest as much in your 401(k) to fund your retirement. Instead, you can use the benefits to help you maintain your lifestyle during retirement.

On average, retirees got $1,413 per month in 2018. The amount of money that people get from Social Security varies significantly. The more money you put into the system while you worked, the more benefits you will get after you retire.

If you’re not sure how much Social Security you can expect, use the SSA’s calculator to get an estimate of your benefits.

It’s unlikely that you can count on Social Security to pay for everything during retirement. Still, the more money you get from SSA, the less money you need to invest in your 401(k). Knowing how much Social Security you can expect will help you decide how much money you need to put into your 401(k) account now.

Inheritance Coming? You’re in Luck

If you’re fortunate enough to receive an inheritance, then you don’t need to invest as much money in your 401(k). Instead, you can use your inheritance during retirement.

Keep in mind, however, that you might not inherit as much money as you think. Even if your parents have plenty of money, they may need to spend a lot of it on medical services as they get older.

On average, American retirees say that they expect to leave $177,000 to their families. That’s a fair amount of money, but it might not last long when you don’t have any other sources of income. Most people still need to contribute to their 401(k) accounts even when they plan to get inheritance money.

You also have to consider the possibility that you won’t get the inheritance that you expect. Don’t assume that your parents or other relatives will leave you everything they own. Talk them to now to make specific plans.

Otherwise, you might discover that they left a significant portion of their money to charities. If that happens, you might not have enough money to retire.

How Many Years Will I Be Retired?

Without getting too morbid, you should make an approximate calculation for how many years you will live after retiring to make sure your savings cover your financial needs.

In the example above, we used 30 years as a benchmark. But all sorts of factors play a role in life expectancy from health to environment to genetics. You will be able to make a more informed guess based on your own personal circumstances.

More generally, the average life expectancy in the US is 76 years for men and 81 years for women, with an average of 78 years.

That means instead of covering 30 years of retirement from the age of 65, our avatar retiree would need to cover approximately 11 years if male and 16 years if female.

This means that the 45 year old maxing out their 401(k) contributions and taking advantage of employer matching while growing their nest-egg at approximately 7% on average annually in an environment with approximately 3% annual inflation could just about cover their retirement needs if they want to maintain a similar lifestyle as when earning $50,000 annually in employment earnings.

Key Lessons

  • If you are starting younger you can afford to save a lot less to end up with a similar sized nest-egg due to the power of compounding.
  • If you start saving at 45 and expect to live longer than average, you will need to save more than the $1,500,000 calculated above.
  • If you earn half the amount calculated, say $25,000, or double the amount, say $100,000, and plan to live a similar lifestyle upon retiring, you will need to halve or double the amounts calculated respectively.

>> What Are The Rules For Roth IRA Withdrawals?

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