One of the most powerful retirement savings tools is your 401(k). The 401(k) is a tax-advantaged retirement savings plan named after the section in the U.S. Internal Revenue Code. This retirement fund lets you (a working individual) contribute a portion of your wages to individual accounts. Your employer is required to match your contribution either as a dollar-for-dollar match up or a percentage of your contribution.
So, what is an appropriate contribution to your 401(k), and more importantly, how much should you be contributing at different life stages? In this blog we look at the ideal contribution levels for each age group:
Ages 20-30: Start Early and Save Smart
Average Balance: $83,804; Median Balance: $32,624
It is during your 20s that you can develop proper financial habits. If you were able to pay off high-interest debt, you should save as much as you can in your 401(k) and other retirement accounts. Contributions in this decade substantially gain from compounding earnings. Even a tiny amount contributed significantly to increase and compound over time. Contribute enough to earn an employer match – after all, this is literally “free money” being contributed to your retirement.
Ages 30-40: Pay Down Debt While Contributing.
Average Balance: $180,164; Median Balance: $76,154
During your 30s, you can expect to be racking up a variety of expenses: a house and family expenses. It is probably critical that you pay off high-interest, non-mortgage debt and are thus making payments, but try to boost your 401(k) contributions. If you still have a balance on high-interest debt, keep in mind the fact that interest rates likely increase any potential gain from your retirement investments. It’s a perfect time to balance debt repayment with aggressive retirement savings.
Ages 40-50: Maximize Contributions.
Average Balance: $376,836; Median Balance: $161,325
You should know your financial landscape by age 40 and at what point you can increase contributions to your 401(k). If you haven’t contributed all of your maximum allowances, $23,000 per year for those under 50, then now is the time to start contributing. The 40s are great building blocks for establishing your wealth and compound interest. You are going to save so you aren’t as worried when you are older.
Ages 50-60: Catch-Up Contributions
Average Balance: $594,948; Median Balance: $257,824
You may be starting to take your retirement plans seriously. For instance, in addition to the standard contribution limit, any participant above age 50 is allowed to make extra catch-up contributions amounting to $7,500 for up to $30,500 in tax-advantaged savings. That’s when you hit the ceiling with catch-up contributions to fortify your retirement savings even more, considering that you’re still trying to catch up on your savings.
Ages 60-70: Planning for Retirement
Average Balance: $571,324; Median Balance: $208,301
This is usually the transition decade. You’re getting close to retirement. It’s an excellent time to ponder what you will do with your lifestyle and how you’ll fund those activities. Consider when you will take Social Security and how 401(k) fits into that plan. Hopefully, you’ll have a better understanding of what you will be requiring when you retire at this stage. Strategic retirement account withdrawal is a huge quality-of-life changer while retired.
Ages 70 and above: Evaluating Your Financial Health
Average Balance: $427,762; Median Balance: $104,105
Most individuals retire around their mid-60s and come to their 70s, at which time most will find the balance of their 401(k) decreased because they start taking out of it. In reality, it is just a matter of factors as to how and when you may tap your retirement savings, so plan. Consider plans for Medicare that fall within your years, what insurance needs you’ll require, and then a plan of just how you will draw down the money so that it endures the rest of your years.
Where Do You Fit In?
These numbers are intimidating, and there are always things that pop up that require more control over medical bills, education costs, or even a change in career. Whatever it is, first job or last, you want to save as much of it as possible into retirement. The sooner you start to save, the better for an easy retirement.
Conclusion
Remember that the 401(k) is an invaluable resource to help secure your financial future. Have you become overwhelmed or unsure about your strategy? Then, contact a Financial Educator or Retirement Specialist for one-on-one help. At Plush Retirement, we have a very experienced trust and estate advisor dedicated to ensuring that you enjoy the retirement that you deserve.
