How Much Should You Have In Your 401k?

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401k is considered one of the most common retirement savings accounts being offered by companies to their employees. It’s one of their ways to assist their workers in preparing for their future. This account is very beneficial as it has both savings and tax advantages.

This retirement fund is not limited to cash but can also be in the form of stocks, real estate investment trusts, and mutual funds. What’s good with this is that it’s temporarily deductible from the taxable income up the portion of the employees’ contribution.

The only time they’ll be subjected to tax is when they withdraw the money upon retirement or when they reach the age of 60, and their tax bracket is lower. This typically serves as one of the perks that an employer offers to applicants when trying to lure them into signing the contract.

How Does 401k Work?

One of the ways this system works is by matching. This is done by having a percentage of the salary of the employees deposited into their 401k accounts. The employer will then match these with a certain amount or percentage.

Another type of 401k plan is through profit-sharing, which typically has higher employer share as this will be a percentage of the company’s income. Typically, applicants prefer profit-sharing over matching.

However, employers usually use the 401k as a means to hold employees for a specific period or otherwise known as the vesting period. This means that the employee cannot withdraw the money for a fixed set of years, so they’re forced to stay until such time that the vesting period has ended.

Once the employee resigns or is terminated by the company, they’ll be allowed to keep their contributions, along with the employer’s vested contributions. The catch is that, when they withdraw the 401k as cash, they’ll be subjected to taxes and penalties.

Currently, the cap on tax-deferred employee/employer contribution is set at $51,000. To work around these, the employee should roll over the savings to another retirement account, like an Individual Retirement Account (IRA).

Importance of Retirement Funds

Retirement isn’t just about how much funds you’ve saved up but living a happy and

fulfilling life after retirement. Having said that, it’s quite futile comparing your savings to that of your colleagues or friends. Thus, it doesn’t matter if they have $225,000 on average in their 401(k) at age 50, and yours is just $100,000. However, comparing for the sake of making it an inspiration to do better at saving would be great.

Competing is also good as long as the end goal is to cover your own planned retirement lifestyle and not for anything else. As long as you have made an effort to save up for your future to live comfortably, even if not luxuriously, that’s all that matters.

What are the Expected 401k Balance by Age?

Below are the numbers based on a study of Fidelity Investments on the assets that it administers, which is more than $7 trillion in total.

1. 20 to 29 – $11,800 (median $4,300, rate 7%)
2. 30 to 39 – $42,400 (median $16,500, rate 7.8%)
3. 40 to 49 – $102,700 (median $36,000, rate 8.5%)
4. 50 to 59 – $174,100 (median $60,900, rate 10.1%)
5. 60 to 69 – $195,500 (median $62,000, rate 11.2%)

It may appear like these 401(k)s are consistently underperforming. Again, please take note that these only represent those that Fidelity handles. It’s worth noting that a lot of people tend to have more than one retirement account.

In the actual scenario, there are particular thresholds that you need to use as a guide in order to hit the ideal amount of savings you should have at a certain point in your life.

Here are some of those:

1. By 30, you’re expected to have one half to one year salary equivalent
2. By 40, you’re expected to have two to three years salary equivalent
3. By 50, you’re expected to have four to five years salary equivalent
4. By 65, you’re expected to have six to eight years salary equivalent

Parting Words

With the high standard of living nowadays, especially if you have to live all alone during your senior years, the retirement fund is really something to be taken seriously. In a place where independence is highly encouraged, you’ve got nothing to depend on but yourself.

While the numbers might not be enough to cover all of the things that you want to do or achieve during your retirement years, they’re still something to get you through your old age, especially the basic needs. What’s important is to make the most from your 401k and avoid living the rest of your life in poverty and regret.

If you feel that enough won’t be enough for you in the near future, then you might need to improve your retirement plans while you still have time.

By Mahira Khan

© 2019 Mahira Khan - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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