How Much Should I Have in My 401k?

How Much Should You Have in Your 401k? The Ultimate Guide

You’re here because you want to know – how much money should I have in my 401k? , it’s a smart question to ask. , your 401k is likely going to be one of your biggest sources of income in retirement. , so it’s crucial to make sure you’re on track.In this comprehensive guide, we’ll cover everything you need to know about 401k balances – from how much the “experts” recommend having saved at different ages, to strategies for maximizing your contributions. , we’ll also look at some hypothetical scenarios to illustrate just how much of an impact things like fees and investment returns can have over time.So grab a coffee, and let’s dive in – your future retired self will thank you.

Why Your 401k Balance Matters

Before we get into the nitty-gritty numbers, let’s quickly discuss why having a healthy 401k balance is so important in the first place.The sad reality is that Social Security alone likely won’t be enough for most people to maintain their pre-retirement standard of living. , the average Social Security retirement benefit was just $1,668 per month in 2022 – or around $20,000 per year.Unless you’re planning on an extremely frugal retirement, you’re going to need supplemental income from sources like a 401k, IRA, or personal investments. , a robust 401k can help close that gap and ensure you don’t run out of money too soon.The other major benefit of 401ks? The tax advantages. , contributions are made pre-tax, which reduces your taxable income for the year. , your money then grows tax-deferred until you begin making withdrawals in retirement.Those two factors – tax-deferred growth and the ability to contribute pre-tax dollars – allow your 401k balance to grow much faster than a normal brokerage account. , it’s one of the most powerful wealth-building tools available.

What’s a “Good” 401k Balance By Age?

This is the million dollar question – how much should you have in your 401k based on your age?The truth is, there’s no one-size-fits-all answer. , everyone’s situation is different based on factors like:

• Income level
• When you started contributing
• Investment returns
• Fees paid
• Retirement goals and expected expenses

That said, there are some general guidelines and rules of thumb to give you a rough idea of whether you’re on track or behind. , let’s look at the numbers:

Fidelity’s Age-Based 401k Savings Benchmarks

One of the most commonly cited guidelines comes from Fidelity, the large retirement plan provider. , they recommend having the following amounts saved up at different ages:

So if you’re 40 years old earning $60,000 per year, the Fidelity benchmark says you should have around $180,000 saved in your 401k by that age.Of course, these are just guidelines – not hard rules. , you may need more or less depending on factors like:

• Whether you’ll receive a pension
• If you plan to work past “normal” retirement age
• Your expected healthcare costs in retirement
• Lifestyle expectations (travel, etc.)

But the Fidelity benchmarks are a good starting point to gauge if you’re at least in the right ballpark.

Average 401k Balances By Age

Another way to evaluate your 401k balance is to compare it to the averages based on data from Fidelity and Vanguard:

A few key takeaways from this data:

• 401k balances tend to grow slowly early on, then accelerate in your 40s and 50s as you (hopefully) reach your peak earning years.
• There’s a huge range at every age – the “average” may not be a great benchmark for your specific situation.
• Many people are likely behind based on the Fidelity guidelines, especially in their 20s and 30s.

The bottom line? , don’t just go by the averages – use them as one data point, but focus on your own goals and situation.

Strategies to Maximize Your 401k

Feeling behind based on the numbers above? , don’t panic – there’s still plenty you can do to get that 401k balance up where it needs to be. , here are some key strategies to consider:

1. Increase Your Contribution Rate

This one’s obvious, but it’s the most powerful lever you have for building a bigger balance. , the more you can afford to contribute to your 401k (up to the annual max), the faster it will grow.A good rule of thumb? , aim to contribute at least enough to max out any employer match (more on this in a minute). , from there, increase your contribution rate gradually each year until you hit the IRS limit of $22,500 for 2023 ($30,000 if 55 or older).

2. Take Advantage of Employer Matching

If your employer offers a 401k match, you’re essentially getting free money by contributing enough to qualify for it. , it’s an instant return on your investment that you can’t get anywhere else.Let’s say your employer matches 50% of your contributions up to 6% of your salary. , if you earn $60,000 per year and contribute $3,600 (6% of your pay), your employer would kick in another $1,800. , that’s an automatic 50% return that you’d be crazy to pass up.

3. Minimize Fees & Investment Costs

The fees and costs associated with your 401k investments can have a huge impact over time due to compounding. , a difference of just 1% in annual fees can mean tens of thousands of dollars less in your account after a few decades.Do some research on the expense ratios of the funds in your 401k. , aim for low-cost index funds and ETFs when possible to minimize those pesky fees eating into your returns.

4. Optimize Your 401k Portfolio

Speaking of investments, make sure your 401k portfolio is properly allocated based on your age and risk tolerance. , too aggressive and you could get burned by volatility. , too conservative and your money may not grow fast enough.Many 401k plans offer target date funds that automatically adjust your allocation for you as you get closer to retirement age. , if you’d rather go the DIY route, consider working with a financial advisor to get your asset allocation right.

5. Explore the Roth 401k Option

If your employer offers a Roth 401k option, it’s worth considering – especially if you’re earlier on in your career.With a Roth 401k, you contribute after-tax dollars. , but your money then grows 100% tax-free, and you can make tax-free withdrawals in retirement.For younger workers who expect to be in a higher tax bracket later in their careers, paying taxes upfront can be a smart move to minimize your overall tax burden.

6. Let Compounding Work Its Magic

Here’s the beautiful thing about 401ks – the sooner you start contributing, the more powerful compounding becomes in growing your balance.Let’s look at a quick example:

• Person A starts contributing $5,000 per year to their 401k at age 25, earning 7% annual returns.
• Person B doesn’t start until age 35, but contributes $10,000 per year earning the same 7% returns.

Who will have the larger balance at age 65? , surprisingly, it’s Person A – with over $1.3 million compared to just $850,000 for Person B.The lesson? , start investing early and be patient. , compounding is an incredible wealth-building force when you give it enough time.

What If I’m Way Behind on My 401k?

Maybe you’re reading this and realizing your 401k balance is way off track based on the guidelines we covered earlier. , don’t panic – there are still steps you can take to course correct.First, go through the strategies above and identify areas you can improve:

• Increase your contribution rate as high as possible
• Cut investment costs by switching to low-fee funds
• Adjust your asset allocation to be more growth-oriented
• Explore the Roth option if it’s available

From there, you may need to get more aggressive with your savings and make some bigger lifestyle changes, like:

• Downsizing your housing
• Cutting recurring expenses
• Taking on a side gig or freelance work to boost your income
• Delaying retirement by a few years

It’s not easy, but getting that 401k balance up is crucial if you want to avoid struggling financially in retirement.The other option? , explore alternative income streams beyond just your 401k, like:

• Contributing to a Roth IRA
• Building passive income through a business or real estate
• Investing in taxable brokerage accounts

The key is taking action now before it’s too late. , the longer you wait, the harder it becomes to catch up.

Don’t Forget About RMDs

One final consideration as you’re building up that 401k balance – be mindful of required minimum distributions (RMDs).Once you turn 72, the IRS requires that you begin taking minimum distributions from your tax-deferred retirement accounts like 401ks and traditional IRAs each year. , the amount is based on your account balance and life expectancy factor from IRS tables.Fail to take your full RMD, and you’ll face a steep 50% penalty on whatever amount you missed.So as you’re projecting how much you’ll need in retirement, don’t just look at your 401k balance alone. , you’ll need to factor in those mandatory withdrawals starting at age 72 to avoid penalties.Roth accounts like Roth 401ks and Roth IRAs are exempt from RMD rules, which is yet another advantage of utilizing that account type.

How Much Is Enough for Your 401k?

At the end of the day, there’s no perfect 401k balance that works for everyone. , it depends heavily on factors like:

• Your desired retirement lifestyle
• Whether you’ll receive other income sources like Social Security or a pension
• If you plan to work past “normal” retirement age
• Your expected health care costs
• Your overall asset allocation across accounts

That said, having a general target like the Fidelity benchmarks can help ensure you’re at least in the right ballpark as you’re saving.The most important things? , start saving early, contribute as much as possible, keep costs low, and let compounding work its magic over time.With discipline and a smart strategy, you can absolutely build up a healthy 401k balance that provides for a comfortable retirement. , it just takes patience, planning, and the willingness to make it a priority.