If you ask any Morningstar specialist for advice, they’ll tell you to save early and save often. No matter the stage of life and investing you’re in, one thing is for certain: You need to save for retirement.
One popular way to do this is by enrolling in your company’s 401(k) retirement plan. With this retirement savings vehicle, your contributions aren’t taxed and many companies offer an employee match.
How Much Should I Contribute to My 401(k)?
Some folks have ambitious retirement goals, from those dedicated to the Financial Independence, Retire Early, or FIRE, movement to those who are aiming to save $1 million in their 401(k). What if you don’t fall into, or anywhere near, those categories?
No matter your ambitions, there are still limits to guide your contribution plans.
Starting in 2024, here are the individual 401(k) contribution limits:
Under age 50: $23,000
50 and over: $30,500
(Note: Part of your contribution may also come from your employer if they offer a company match. For 2024, the IRS announced the limit for combined employer-employee contributions is $69,000.) Keep in mind, these are limits—not numbers you have to meet every year. One of the most widely used guidelines for setting and tracking your savings goals is Fidelity’s Age-Based Savings Benchmarks.
Remember, this is just a guideline, and the specifics will vary depending on the individual.
How Much Do I Need in My 401(k) to Retire?
If you’re following Fidelity’s benchmark as a guideline, your target is 10 times your salary at 67. However, many variables can come into play when it comes to calculating your retirement savings “number.” Morningstar’s director of personal finance, Christine Benz, also recommends taking these factors into account:
What is your “income-replacement rate”? Find out how much of your working income you’ll most likely need to replace in retirement. Benz recommends a benchmark of 75% to 80%.
How much do you expect your retirement spending to change versus what you’re spending now? This checklist is a good place to start.
What other nonportfolio sources can you rely on? This may include a pension or Social Security.
Should I Contribute to My 401(k) or Pay Off Debt?
Juggling financial goals is something you’ll be doing throughout your entire life, writes Morningstar’s Josh Charlson. He recommends, even it’s small, to make contributions to your 401(k) so you can get a head start.
To help you balance these financial goals, have a plan for paying down your debt. After you figure out how much you owe, how much time you have, and what the interest rates are, consider trying out one of these methods:
Debt avalanche: Rank your debts based on the interest rate from highest to lowest, make minimum payments on all the debts, and throw extra cash at the highest interest-rate debt. Once you pay off the highest interest-rate debt, move onto the next highest one.
Debt snowball: List your debts from smallest to biggest, make minimum payments on all the debts, and throw the extra cash on the smallest balance. Once you pay that one off, move onto the next debt, and keep building up the snowball until everything is paid off.
Develop a plan that works best for you and your situation with these steps.
What Is a 401(k) Catch-Up Contribution?
If you’re 50 or older, you’re eligible for a catch-up contribution. Catch-up contributions are a way for you to save more for retirement later in your life, which can be helpful if you already had a late start. The limit for 2024 catch-up contributions is $7,500 for a 401(k) and $1,000 for an IRA. Visit the IRS website to find out if you’re eligible for catch-up contributions.
If you’re feeling behind, portfolio strategist Amy C. Arnott has some ways you can play catch-up with your retirement savings based on your life stage:
In your 30s: Try saving 15% of your income.
In your 40s: Try saving 18% of your income or maxing out your contributions every year.
In your 50s: Increase salary percentage, max out contributions, consider catch-up contributions, or contribute to taxable accounts.
In your 60s: Delay retirement or work part-time, readjust your spending, or consider a fixed annuity.
A previous version of this article appeared Nov. 3, 2023.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
Fidelity says by age 40, aim to have a multiple of three times your salary saved up. That means if you're earning $75,000, your retirement account balance should be around $225,000 when you turn 40. If your employer offers both a traditional and Roth 401(k), you might want to divide your savings between the two.
Save enough to have 80% of your pre-retirement salary. For example, if you make roughly $75,000 a year, you'd need 80% of that, or $60,000 per year during your retirement years to maintain the same standard of living you had while working.
You can retire a little early on $400,000, but it won't be easy. If you have the option of working and saving for a few more years, it will give you a significantly more comfortable retirement.
As a rule of thumb, experts advise that you save between 10% and 20% of your gross salary toward retirement. That could be in a 401(k) or in another kind of retirement account. No matter where you save it, you want to save as much for retirement as you can while still living comfortably.
If your employer matched your 401(k) contributions, that match doesn't count toward your employee limit. Together, the limit for your contributions and an employer match is $69,000 in 2024, up from $66,000 in 2023.
£300k in a pension isn't a huge amount to retire on at the fairly young age of 60, but it's possible for certain lifestyles depending on how your pension fund performs while you're retired and how much you need to live on.
Is $4 million enough to retire at 60? If you want to retire at 60, $4 million should be more than enough money. Let's consider the following calculation: if you retire at 60 with $4 million and want this money to last until you reach the age of 80, you will receive an annual income of $200,000.
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you'd have a combined annual income in retirement of $40,000.
Taking the same calculations as if you plan to retire at 50, suppose you plan to retire at 60 with $100k in savings, and you need this money to last for now 20 years until the age of 80. Without including income from other sources, this would leave you with a monthly income of just $417.
A 401(k) can count as savings in a 50/30/20 budget plan. But if 401(k) contributions are automatically deducted from your paycheck, they're not included in your take-home pay calculation.
The value of 401(k) plans is based on the concept of dollar-cost averaging, but that's not always a reliable theory. Many 401(k) plans are expensive because of high administrative and record-keeping costs. Nonetheless, 401(k) plans are ultimately worth it for most people, depending on your retirement goals.
However, the general rule of thumb, according to Fidelity Investments, is that you should aim to save at least the equivalent of your salary by age 30, three times your salary by age 40, six times by age 50, eight times by 60 and 10 times by 67.
According to estimates based on the Federal Reserve Survey of Consumer Finances, only 3.2% of retirees have over $1 million in their retirement accounts. This percentage drops even further when considering those with $5 million or more, accounting for a mere 0.1% of retirees.
A general rule of thumb says it's safe to stop saving and start spending once you are debt-free, and your retirement income from Social Security, pension, retirement accounts, etc. can cover your expenses and inflation.
However, the general rule of thumb, according to Fidelity Investments, is that you should aim to save at least the equivalent of your salary by age 30, three times your salary by age 40, six times by age 50, eight times by 60 and 10 times by 67.
Can I Retire At 60 with 300K? $300,000 is likely too little to retire on at age 60. Using the 4% rule, which estimates how much you can safely withdraw per year from your savings in retirement, a $300,000 nest egg would give you $12,000 per year to live on.
From the results, the average 30 year old should have between $100,000 – $350,000 saved up in their 401k, depending on company match and investment performance. If you're looking for a realistic goal, then focus on the Middle column all down the chart.
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