Do you have enough saved in your 401(k)?
Determining the ideal 401(k) balance can be difficult as it varies based on your age, income, and retirement objectives. The average 401(k) balance across all age groups is $129,300¹; however, a small number of high savers can increase this amount. The median balance is much lower. As you get older, your 401(k) balance should increase, with funds coming from both your contributions and your employer’s matching contributions. To ensure you’re on target, it’s helpful to set savings goals for each age group. Here are some general benchmarks to consider.
By Age 30: One Year’s Salary
Some professionals recommend aiming to have your annual salary in your account by the time you reach 30 years old. For instance, if you earn $40,000 per year, your balance should be around $40,000. Since younger individuals have more time to invest, they may opt for riskier investments such as stocks, which can have more volatility but offer higher returns over time compared to safer options such as bonds. While your balance may fluctuate from year to year, you have a considerable amount of time for it to balance out before retirement.
By Age 40: Three Times Your Salary
As you continue to save and earn returns from the market, you can aim to have three times your salary saved by the time you turn 40. However, reaching this goal can be challenging as you navigate financial obligations such as purchasing a home or raising children between ages 30 and 40. While many individuals find it difficult to maintain a 10% savings rate as they get older, it’s important to budget and prioritize your retirement savings to meet your goals.
By Age 50: Six Times Your Salary
As you progress in your career, your retirement savings should increase as well. The reason for this is twofold. First, as you earn more, it becomes easier to save. Additionally, you’ll receive more matching contributions from your employer, as a higher salary means the same percentage of employer matching is worth more. Second, the returns on your 401(k) investments are compounded over time. You earn investment returns not only on the money you initially invested at 30 but also on all the money you’ve added since then. This compounded growth accelerates your portfolio’s growth in later years.
By Retirement: 10 Times Your Salary
One common recommendation from professionals is to aim for having ten times your final salary in your 401(k) when you retire. For instance, if your salary is $70,000 at retirement, your goal would be to have a balance of $700,000 in your 401(k). To achieve this, a good strategy is to save 15% of your salary and to participate in employer matching programs as you advance in your career. While there are no guarantees, historically, the market has shown a relatively predictable rate of return over a long-term horizon.
It’s Time to Save
Saving 15% of your income for retirement can be challenging, but it’s a crucial investment in your future. You’ll reap the benefits in your later years. If you require assistance with retirement planning or assessing your 401(k) contributions, seek advice from a financial professional. They can collaborate with you to develop a strategy that aligns with your financial goals.
Source:
¹Vanguard. (2021). How America Saves 2021. Retrieved from https://pressroom.vanguard.com/nonindexed/HAS2021_PR.pdfÂ
