How much money do you need in your 401(k)?

Summary

What is a 401(k)?

A 401(k) is a defined contribution plan that many companies offer their employees.

When you join a company, you can opt into this retirement savings plan. From then on, a predetermined portion of your paycheck is put into your 401(k) account. This money can be contributed either pre or post-tax, depending on what type of 401(k) you have.

This contributed money is then invested. When opening your account, your 401(k) provider will offer you a choice of investment options. The most common of these are stocks, bonds, and cash.

Some companies will also match your 401(k) contributions.

This is done by percentage, with employers matching a certain percentage of your contribution. Some employers even offer a 100% contribution match. For example, if you make a 7% contribution to your 401(k), which works out to around $250, your employer will also contribute $250.

Over time, your 401(k) will hopefully grow with the returns made on your investments, helping you afford the retirement you want.

If you want to learn more about how a 401(k) works, click here. Alternatively, if you want to speak to an expert, Unbiased can connect you with a financial advisor in as little as 48 hours. Find a financial advisor now.

How much should I have saved in my 401(k)?

It isn’t easy to specify how much you should have saved up in your 401(k) because it depends on your personal circumstances and even on your generation. Unfortunately, there’s no easy equation that says how much you should save for your retirement.

Many financial advisors will recommend saving at least 15% of your pre-tax salary for retirement. However, this takes a number of factors for granted.

For example, the current cost of living is making it harder and harder to save. Gen Z and younger millennial savers, as a cohort, face a persistently high cost of living, which may hinder their efforts to save.

A recent survey found the emergency savings of 46% of Gen Zers are lower today than in 2020.

So, for now at least, young people have more of a mountain to climb to max out their 401(k) contributions each year.  

Meanwhile, the older generations who may have wanted to save more later on in life when their income was higher are now being met with higher day-to-day prices that are eating into their budget.

However, it’s useful to set your sights on some good 401(k) benchmarks.

While your saving goals need to be realistic and will undoubtedly vary, the following benchmarks will see you on the right track to a comfortable retirement.

How much should I have saved in my 401(k) by 30? 

It’s generally believed that if you have an amount roughly equivalent to your annual salary saved up in a 401(k) by the age of 30, you’re off to a good start.

Your 401(k) investments will also be earning compound interest, meaning that your returns will only grow over time.

So, the longer you leave your 401(k) invested, the more your returns will multiply.  

How much should I have saved in my 401(k) by 40? 

Having 401(k) savings equivalent to at least 1.5-2 times your annual salary by your 40th birthday is a good goal.

Perhaps your seniority in the workplace has enabled you to put aside a figure closer to 2.5 times your salary. If so, that’s all the better. 

How much should I have saved in my 401(k) by 50? 

By the time you reach the later years of your career, your specific personal and professional experiences will have influenced your ability to save over time, so the savings range becomes wider.

However, it’s not uncommon for people to have accumulated 401(k) savings equal to 5-6 times their annual salary in a 401(k).  

How much should I have saved in my 401(k) by 60? 

Depending on your circumstances, by the time you reach 60, you could have around 7-8 times your salary or more saved in your 401(k).

Many people choose to continue contributing to a 401(k) after this age, while others might already be using their 401(k) returns.

However, bear in mind that your 401(k) distributions will still be subject to income tax. 

If you’re finding your numbers aren’t adding up, it might be time to reach out to the experts and get your retirement plan back on track. Unbiased can connect you with a financial advisor perfectly suited to meet your needs. Get started here.

How much can you contribute to a 401(k)?

While you can set your savings goals, you need to be aware of the limit to how much you are allowed to contribute to a 401(k) each year.

In 2024, the maximum you can contribute to your 401(k) is $23,000. However, this doesn’t take into account contributions that your employer could make.

In 2024, the combined maximum contribution from both an employer and employee is $69,000.

In 2023, these figures were $22,500 and $66,000, respectively.

You should also be aware that 401(k) plans allow for catch-up contributions, which are additional payments those over the age of 50 can make to their plan.

In 2024, you can add an additional $7,500 to your 401(k) by utilizing catch-up contributions.

Do I pay tax on my 401(k)?

401(k)s are a tax-efficient retirement savings tool.

When you pay tax will, however, depend on the type of 401(k) you have.

If you have a traditional 401(k), your salary contributions are paid before any tax. You will then be taxed when you start making withdrawals from your account.

It’s important to remember that the returns on your investments will be taxed at the normal rate once you withdraw them. When you take a 401(k) distribution, you will pay the normal rate of income tax for your tax bracket.

If you have a Roth 401(k), your contributions are made with money that has already been taxed.

This means you will not have to pay any tax on qualified withdrawals.

You should also be aware that an early withdrawal penalty of 10% can be applied if you withdraw from any 401(k) before the age of 59½.

How do I plan for retirement?

There’s no total amount that you are legally obliged to save in your 401(k).

Instead, the amount you save will vary depending on what you want your retirement to look like.

Before you start making contributions, take a moment to think about your retirement goals.  

For example, if you’re thinking about relocating when you retire, you’ll need to think about the cost of your new home and the associated outgoings.

If you’ll be paying a mortgage or wanting to live somewhere with a high rent, you’ll need to factor this into your savings plans. 

You should always remember that a 401(k) will return a fixed amount and won’t rise or decrease based on inflation or the cost of living.

Should the cost of living rise higher than anticipated, you’ll be left with less money to rely on, and inflation can also eat into your savings. 

How can I reach my retirement goals?

For some, a 401(k) will be a helpful way to reach your savings goals and the post-working life you’re planning for.

Others may be better off exploring alternative options, such as other investment strategies, a secondary form of income, or something else entirely.

When it comes to planning for retirement and meeting your goals, it’s always best to get expert financial advice.

A financial advisor can help you build a comprehensive and personalized plan that will help you reach your retirement goals.

Just answer a few simple questions, and we’ll look after the rest.

Match with an advisor now.