How much money do you need in your 401k?

4 mins readLast updated October 4, 2023by Kate Morgan

Your 401k is the key to your retirement. But when should you start saving, and how much should you be looking to put in there? Here’s the lowdown.

What is a 401k?

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

You set aside a portion of your pre-tax paycheck which is then invested into mutual funds and other investments.

Some companies will also match your 401k contributions. So, if you make a 7% contribution to your 401k, some employers will also match your 7% contribution.

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

How much can you contribute to a 401k?

There is a limit to how much you are allowed to contribute to a 401k each year.

In 2022, the figure is $20,500. However, this doesn’t take into account contributions that your employer could make.

At the time of writing, employers can contribute up to $40,500 on your behalf, meaning that you could put away as much as $61,000 towards your future this year.  

How much tax will I pay on my 401k?

While your salary contributions can be paid into a 401k before any tax, 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 401k distribution, you will pay the normal rate of income tax for your tax bracket.

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

Planning for your retirement

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

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 401k 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. 

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

How much should I have saved in my 401k?

It’s difficult to specify how much you should have saved up in your 401k, because it depends on your personal circumstances and even on your generation.

For example, 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 401k contributions each year.  

However, it’s useful to set your sights on some good 401k 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 401k by 35? 

It’s generally believed that if you have an amount roughly equivalent to your annual salary saved up in a 401k by the age of 35, you’re off to a good start.

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

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

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

Having 401k savings equivalent to at least 1.5 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 401k 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 401k savings equal to 3-5.5 times their annual salary in a 401k.  

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

Depending on your circumstances, by the time you reach 60, you could have around 4.5 times your salary or more saved in your 401k.

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

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

Can a 401k help me reach my retirement goals?

There are advantages and disadvantages to using a 401k as a primary route to your retirement.

For some, a 401k 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 a pension, a secondary form of income, or a mix of both.

Content writer

Kate Morgan

Kate has written for leading publications and blue chip companies over the last 20 years.