Many wonder what the average 401k balance should be by age. Your retirement contribution is one of the most important things that you have to focus on, and number one in your hierarchy of savings.
That doesn’t mean it will be an easy thing to do. You need to start contributing to your 401k early on, and if you don’t you will have a tall hill to climb.
The United States has a retirement crisis. Around 37% of all pre-retirees don’t have any retirement money. Additionally, 63% of all Americans have a full or part time job, but only 21% of them actually max out their 401k. Over time, more and more Americans don’t have enough saved for their retirement, which in the end comes with its fair share of problems and challenges.
Savings Potential
It’s important to understand your savings potential as much as possible if you want to achieve great results. Adaptability is key just because there are so many options. There are some assumptions made that will keep the validity of this intact. The numbers are mostly helping you look forward as the previous 401k contribution was a lot lower, so it doesn’t really reach the values we list here.
We also assume the fact that you start being employed full time at the age of 22, and you go to a company that provides a 401k without company match. As for the monthly contribution, we suggest maxing out and contributing $18,500 as quickly as possible. If your initial salary is lower, we suggest at least contributing $8,000.
There’s also a high end, but that does take into account a 8.8% growth over the 43 years you are putting money aside.
Are there restrictions?
The primary restriction for is that you cannot tap into your contribution right away. If you tap into your 401k early, you may face a 10% penalty from the government. The soonest you can access your 401k is 55 if you retire that year, otherwise the soonest is when you are 59 1/2.
In addition, there are some rules when it comes to when you can withdraw the money and you will also deal with some very costly penalties if you want to pull out any of the funds before you actually retire. It’s important to keep the penalties in mind if you want to access these savings early. Even if you can do that, the penalties and restrictions will make the process hard to deal with.
How much should you contribute until your 30s?
When we calculate average 401k balance by age, we assume that you start working when you are 22. That means even on the low end you will have $8,000.00 set aside when you are 23. When you are 24 you will have $26,500.00, at 25 the accumulated amount will be $45,000.00. When you are 30, you will already have $137,500.00 in your 401k. That being said, these figures are for the lower end of the spectrum. If you go for a full contribution starting with the first year, when you reach 30 years of age you will have $212,312.11.
The idea is to start working early as possible. You will need to opt for the high end of the spectrum if you want to obtain great results, so try to keep that in mind.
How much should you have in your 40s and 50s?
Continuing with the low end of average 401k balance by age, you should have around $230,000 when you are 35 and $322,500 when you are 40. At 45 you should accumulate $415,000.00, and when you’re 50 you should have $507,500.00 in your 401k.
If you go ahead with the higher end of the spectrum of average 401k balance by age, you can have around $2,230,034 when you are 50. So yes, there’s quite the difference here, and that is thanks to the law of compounding interest.
The reality is that a lot of people just can’t afford opting for a very high retirement contribution right off the bat. They do that later on in their life. If you do have the possibility to opt for such savings, you need to do that as quickly as possible so you can achieve the best results.
Once you get past 50, things get even better. At 55 on the low end you can have $600,000, at 60 $692,500 and at 65 $785,000. However, if you do go with more than just the minimal investment, the result really adds up. On the high spectrum at 65 you can have $8.9 million dollars. As we mentioned earlier, this requires you to start working at 22 and continually max out your contribution until you are 65.
As you can see, maxing out your 401k as early as possible will be well worth the effort. You can acquire quite a lot of money in the long run, and that will definitely increase your average 401k balance by age. That’s what the 401k contribution is all about.
Can you reach these figures with your 401k?
A lot of people don’t see their 401k contribution as something important. They focus a lot more on getting money now rather than saving for later. Which is why the average 401k balance by age figures are not exactly what you end up getting in the end. A lot of people who are 65 have around $200,000 or less in their 401k.
How much should you contribute?
Simple put, the more money you contribute, the better. Ideally you want to contribute at least enough in order to take advantage of the matching program of your employer. If you contribute less, you are literally walking away from free money.
Our recommendation is to max out your 401k contribution as quickly as possible. The more you have in your 401k, the more you will save in taxes. Which is one of the two largest wealth destroyers.
There are lots of average 401k balance by age calculators that give an estimate based on your contribution. But as we mentioned already, the more you contribute, the better.
What does it mean to be vested?
Vesting means that you own the entire amount in your 401k. Of course you are always vested in the 401k elective contributions, however the employer contributions might limit your capabilities, so you have to keep that in mind. Every contribution plan has its own vesting rules. That’s why the smart thing to do here is to focus on working closely with the benefits administrator.
Can you contribute to both an IRA and a 401k?
You can do that, of course.However, your income determines if you can take a tax deduction from the IRA contribution. It’s important to take all these little things into account, as they are going to offer you some rewarding results and benefits all the time due to that.
Does the 401k contribution come with a tax break?
Thankfully, 401k contributions are not taxable income. Not only will your savings grow tax free, you also lower your taxable income as you contribute more. It’s safe to say that the outcome is good as long as you continue to put money aside. Tax savings are always going to encourage you to put money into your 401k, and that’s a really good thing.
That doesn’t necessarily mean you should always focus on placing all your savings into the 401k. You are free to choose whatever plan works for you based on your lifestyle and other factors. The 401k is an excellent retirement tool, but it shouldn’t be the only tool you use.
Are there any options when you leave your employer?
If you change employers, you have some options for the old 401k account. You can leave it as it is, or you could roll it over to an IRA. You can also cash out, which is the absolute last thing you should do.
Typically, we would recommend rolling your 401k over to an IRA. Doing so gives you the most financial flexibility. Many employers charge a ton for investment funds in their 401k. IRAs give you access to ETFs like Vanguard or Fidelity who have razor thin fees. If you decide to invest in individual companies, you won’t pay a nickel in fees.
Can you borrow money from the 401k?
Yes, you are allowed to borrow from your 401k most of the time. However, the employer plan needs to allow such a thing, so make sure you verify with them. Usually you can borrow up to $50,000 or half of the 401k balance, whichever one is the smaller amount.
But even if this is allowed, you want to avoid taking money out of your 401k. This will reduce your compound growth, and you will also end up with penalties if you don’t repay the amount within a certain timeline.
Average 401k Balance by Age – The Bottom Line
As you can see, the average 401k balance by age will vary based on your contribution. This is why we always encourage maxing out your contribution. If you are behind, don’t sweat at all. The sooner you acknowledge this, the sooner you can reverse course and start maxing out your contributions.